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Avoid Lifestyle Inflation

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toyota cressida

The Toyota Cressida was my first car. This one looks a lot better than mine did though.

This is #2 in my big Retirement Advice to Young Folks series.

Lifestyle inflation is the bane to early retirement. Heck, it’s the bane to having a balanced budget *period*. Most of us were starving students at some point in our lives and we spent very little. When I was in college, the only non-school related things I spent money on were groceries and rent. I rarely ate out, never took a spring break trip to some exotic locale, didn’t own a car, and was super cheap. Mrs. RB40 was the same way.

Lifestyle inflation is almost unavoidable when you start making good income. I don’t know anyone who was able to keep their student budget lifestyle in real life. I think Jacob at Early Retirement Extreme might be the only one I know of that is living on such a bare bones budget. I started saving for retirement right away and was able to avoid credit card debt in spite of all the enticing offers. However, I can’t deny that I went through the lifestyle inflation phase, too.

1-3 years after I graduated

ford escort zx2 lifestyle inflation

This car was quite reliable for about 10 years. After that, all kind of things started to go wrong. Mine was light blue.

  • Housing. I got a 1 bedroom apartment by myself when I first started working. Previously, had always shared a room with a roommate. After a year, I shared the rent on a 2 bedroom apartment with a roommate, which saved some money.
  • Groceries. This one is a bit cloudy because I can’t remember what kind of groceries I purchased exactly. However, I’m sure this expense category went up a bit. I tried different food ingredients and experimented with cooking much more than when I was in college. Overall, this is not a bad thing because cooking at home is a great skill to have.
  • Entertainment. This one is a big one for me. I almost never paid for entertainment when I was in college so there was a big pent-up desire to spend money. Once I made some friends, we went out every weekend. Eating out, going to movies, concerts, shows, and clubbing are a lot of fun. It costs money, but when you’re young, you care more about having fun than saving.
  • Car. I was driving a beat up Toyota Cressida and sadly I couldn’t say no to a car loan. I got a new Ford ZX2 and had a small car payment for 5 years. I should have saved up cash to buy a reasonable used car instead. At least we got 13 years of use out of the ZX2 (Mrs. RB40 and my brother drove it, too) before we sold it.

5-10 years after graduation

lifestyle inflation bmw

Convertibles are the best! Someday we’ll get another convertible. It’ll probably be a used Miata.

  • Housing. I got married and we purchased our first home. We justified the size by expecting our family members to come visit us often. This is probably the biggest increase in our expense since graduation. Owning a house is nice, but it is a big expense.
  • Groceries. About the same overall. Mrs. RB40 is partial to nice cheeses so our groceries expense went up a bit.
  • Entertainment. After I got married, I went out a lot less than before. Currently, we go out once a week at most. However, we traveled internationally almost every year. That’s a big cost, but I think the experience is worth it.
  • Car. We got a used ’98 BMW Z3 and paid cash for it. We loved that car and sold it in 2010 after it overheated. By that time, we were ready to buy a family car.

15 years after graduation to present

lifestyle inflation mazda5

A nice family car. Room for 6 and it’s not too big.

  • Housing. We rented out our old house and moved to a smaller condo. It’s more expensive though. 🙁 This is a major expense where we could have done better. In hindsight, we should have stayed in our old home until 2011. The housing price would have been much more affordable if we waited.
  • Groceries. We spend more now because we like to eat a variety of foods and we also have a baby. This will only go up as he grows.
  • Entertainment. We changed our plans to travel within theUSfor the next 5-10 years. It’s much easier to travel in country when you have a kid. He won’t appreciate international travel until he’s a bit older anyway. We haven’t spent much money on entertainment either because we don’t trust a babysitter. Besides, we’re too exhausted to go out.
  • Car. We sold the BMW Z3 in 2010 and purchased a new Mazda5. We lived with no car and saved up for 3 months, then paid cash for the vehicle. I plan to drive this vehicle until baby RB40 goes off to college. We share one car so I wanted a newer vehicle that is more reliable.

As you can see, we didn’t do entirely great at keeping lifestyle inflation down. Even with the lifestyle inflation, we were able to save 100% of my take home pay over the last few years. This gave me the confidence to leave my job and go it alone. Currently, we spend $3,000 to $3,500 a month (see my August cash flow report.) This is a bit on the high side due to the housing cost, and that mistake is difficult to correct.

Advice for the young folks

  • Saving. Setup an automatic saving system to take money out of your paycheck so you don’t spend it. One good way to do this is to contribute to the 401(k).
  • Housing can be expensive and you should try to minimize it even if you are compensated well. Consider a duplex so you can have some help paying off the mortgage.
  • Groceries. It’s almost always cheaper to cook at home so groceries is one place I’m not that worried about.
  • Entertainment. Focus on experiences rather than collecting stuff. Those international trips were expensive, but I have fond memories of all the countries we visited.
  • Avoid car loans. 5 years is a long time to send payments to your bank. You can try Millionaire Teacher’s strategy of buying a junker, driving it for a year, and then selling it off at the same price. Share one car if at all possible.

Do you have any advice on how to keep the lifestyle inflation down? This is very basic, but it is so difficult to execute especially if you are compensated well. We haven’t been entirely successful at keeping our lifestyle inflation down in the past, but it’s been stable for a few years now. I don’t think our lifestyle will inflate much going forward because we are settled in with our routine now.

Photo credit: Toyota Cressida – flickr Hugo90

Photo credit: Ford Escort ZX2 – flickr kevin1024

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{ 36 comments… add one }

  • Mimi September 5, 2012, 1:09 am

    I just think that we should always ask ourselves if we REALLY need to have what we want to buy. Have a priority list and update it whenever necessary. That way u knw what u need NOW and what can wait. And when u have to purchase something make sure u get the best deal possible. For instance, I recently found out that I can get a handbag online for US$13 (free shipping) while the same handbag can cost me US$ 48 at a local ’boutique’!! Guess who is going online shopping?.

    My friends call me the Queen of Cheap for a reason (I once conviced a friend to change her normal TV for a flat screen instead of getting a new notebook with her birthday money).

    • retirebyforty September 5, 2012, 2:59 pm

      I try to do that too. Delaying a purchase is a great way to save money. Sometime you find that you don’t even want it anymore after a few days. 🙂

  • Financial Samurai September 5, 2012, 3:51 am

    A new Mazda5?! That’s BIG BALLING Joe! I bet you have the DVD home theatre system as well!

    • retirebyforty September 5, 2012, 2:58 pm

      Heh heh, we got the low end model. We drive so little, it’s not worth getting all the extras. I’m cheap anyway.

  • This is going to be something we try to focus on but it will be a tough battle. Once my girlfriend’s student loans are paid off we will have to try to set a standard we are comfortable with to stick to. I plan on saving half of every raise for retirement and think that should help. I even wrote a post about it!

    • retirebyforty September 5, 2012, 3:00 pm

      Setting aside the raise for saving is a great way to increase it. Great job!

  • Six figure investor September 5, 2012, 6:07 am

    Ive always been frugal so ive had money leftover to invest or buy rental real estste. Theres no formula but start a plan to spend less than you earn. Whats leftover can be used to increase your income by investing and even increase your spending over the long term. (i like to eat out and travel , i dont budget i just go).

    If you are younger and want to interact with savers and investors ( not unlike early retirement extreme) check out http://www.dividendmantra.com. There are many commenters here with their own blogs talking about their finances.

  • Emily @ evolvingPF September 5, 2012, 6:38 am

    My strategy for combatting lifestyle inflation is to not make much money! Thinking it over while reading this post, honestly I think my lifestyle is lower now than when I was in college (over 5 years ago now). A lot of my expenses were still paid by my parents when I was in college, even though I managed my own discretionary income, and my housing and food situation on campus was actually quite nice. I went out a lot more, too, even though it wasn’t always necessary to spend money.

    Once I’m out of grad school I’m going to strive for conscious lifestyle increases instead of inflation. It’s unrealistic to expect to keep the exact same lifestyle as now when we’re making a lot more money, but I’m using this period to deliberately acknowledge what our needs vs. wants are. We’ll probably start out saving like crazy for a down payment so that will keep our lifestyle in check right at the beginning.

    • retirebyforty September 5, 2012, 3:02 pm

      Your lifestyle is lower than when you were in college? Wow!
      Making more money is a good thing, just don’t spend it all. 😉
      Good luck with the down payment.

    • Gen Y Finance Journey September 5, 2012, 3:59 pm

      I think I may be in the same boat. I didn’t earn a lot of money in college, but my parents paid for all my necessities, so everything I did earn I spent on nights out and shopping trips. I spend more money overall now since I’m paying my own bills, but I think I spend less on entertainment and shopping than I did in college.

  • Michelle @ See Debt Run September 5, 2012, 6:47 am

    I love seeing people’s first cars! My first car was a 98 Civic. I loved that car! We splurged for the pin stripe– yeah buddy! Anyway, I think it’s really hard for young people to be as responsible as you’ve been. It’s so much more important to young people to have the car that everyone else wants, a nice house they can show off and entertain in, name brand clothes, etc. Even now in my 30’s, I still want to wear cute clothes and drive a car that doesn’t embarrass me.

    • retirebyforty September 5, 2012, 3:03 pm

      I should have picked the Civic, it would have lasted longer. 🙂

  • Kurt @ Money Counselor September 5, 2012, 6:53 am

    It is tough to resist the temptation to get that fancy car, electronic, gadget, and fun but costly outings when you start making money. I think if at least some of your friends are types who don’t need to spend a lot of money to have a lot of fun, that helps a lot. Hiking, cycling, gaming, etc. don’t have to cost a lot, for example. To resist the fancy car and so on, read up on “hedonistic adaptation.” We imagine ourselves owning and driving that nice new VW convertible and think how happy we’ll be. But the reality is that the happy effect wears off rather quickly; then all you’re left with is the big debt!

    • retirebyforty September 5, 2012, 3:05 pm

      Hmmm… The convertible happiness actually sticks around. I love convertibles and will get a used one when we move to Hawaii. 😉
      The right kind of friends is one of the key to keeping lifestyle inflation down. If all your friends are spending tons of money on fancy houses and cars, then you’ll be pressured into doing the same. Great observation.

  • Little House September 5, 2012, 6:59 am

    Housing is our biggest expense followed by groceries. As we’ve gotten older we’ve “upgraded” our living situation. We also eat a lot healthier and that does cost more money but is worth it in the end (should save us on healthcare.) I’d like to downsize our living situation within the next year once we move. 40% of our income is too much to spend on housing and utilities!

    • retirebyforty September 5, 2012, 3:06 pm

      Good luck with the hunt. We spend too much on our housing too. It was less than 20% when I was working, but now it’s closer to 40%. 🙁

  • SavvyFinancialLatina September 5, 2012, 7:02 am

    Avoiding lifestyle inflation is definitely hard. I just graduated as you know, and have seen our expenses increase. Even though we are living a frugal lifestyle we are paying more for a nicer apartment (2x as much), have two cars now, etc. We are trying to stay frugal but it’s hard.
    One of the ways I am fighting it, is by setting monthly saving goals. Meeting our saving goals no matter what means having to cut back a little on certain areas sometimes.

    I’m interested in finding out how much more expensive it is to buy a home. Everybody only gives you a fuzzy feeling about owning your home.

    • retirebyforty September 5, 2012, 3:09 pm

      Setting aside saving is a great way to minimize lifestyle inflation. Make it automatic and you won’t even miss the money.
      Check out this post.
      A home is a lot more expensive than renting, but I think it’s a good choice.

  • 20's Finances September 5, 2012, 7:53 am

    We’ve increased out food expenses and entertainment a bit, but now that we don’t have any pent-up desire to spend (we definitely did when we were barely making ends meet), we have stopped our lifestyle inflation. Stopping it early really will help us become financially independent so much sooner. I can’t wait!

    • retirebyforty September 5, 2012, 3:10 pm

      You are still renting, right? It’ll inflate when you buy a house. Sorry to be the bearer of bad news. 🙁
      I’m sure you can keep the other cost down though.

  • Kim September 5, 2012, 8:06 am

    I would tell young people to avoid the car loans. That’s what started us down our road to debt. I agree with you 100% on travel. We have so many places yet to see and want our daughter to experience that as well. I’ve never regretted a trip, just how we have used credit in the past to pay for them. Have you thought about how to budget for that in the future?

    • retirebyforty September 5, 2012, 3:11 pm

      I haven’t planned how we’ll pay for future travel yet. I’m hoping in 10 years we’ll make more money again and will have some extra saving to pay for those international flights.

  • MakintheBacon$ September 5, 2012, 10:18 am

    Sometimes lifestyle inflation can be hard when everyone around you is buying the latest and greatest thing and then flashing it around. I can’t help but feel a little jealous, but at the same time. I feel sorry for them. They aren’t being smart with their money and it will bite them in the butt in the end. I agree with you about the experiences. I rarely go out as entertainment and often save up for a trip. Travelling is definitely worth it. I try to do frugal activities such as having friends over for pizza and board games or potluck dinners.

    • retirebyforty September 5, 2012, 3:12 pm

      Now that I have a kid, we don’t go out as much and spend a lot less money on entertainment. I don’t hang out with flashy people much either so that helps a lot.

  • Kathleen @ Frugal Portland September 5, 2012, 10:51 am

    I think it’s hard to avoid lifestyle inflation, at least to a point. If you save aggressively, though, and you put your money where it’s not easily accessible, then you really CAN’T afford x,y,z shiny toys.

    • retirebyforty September 5, 2012, 3:12 pm

      As long as you don’t charge it. 🙂

  • anon e. mouse September 5, 2012, 12:03 pm

    1. Start saving and keep saving. Pay yourself from your savings.

    Here’s our strategy:
    *All of our income* is deposited directly into a brokerage money market fund. All of it. On a monthly basis we transfer $X to our normal checking account. That is what we consider our “income”. The rest, which stays in the money market (well actually gets parceled out to other investments automatically) is our savings.

    When we get a raise, or a bonus, or stock options, etc.. we never see the money. It goes directly into the money market. We just see what we transfer into our checking. Periodically we increase what we pay ourselves. But that’s a conscious decision. It’s not something that just happens when we get raises or bonuses at work.

    This money market fund is our ‘slush’ account. It is our short- and long-term emergency account, our large purchase account, and our vacation account. When we buy a car, we pay cash out of this account. Paying cash is a great way to encourage yourself to be thrifty in your vehicle purchases. Writing a check for $20,000 is a lot more pleasant than writing a check for $40,000.

    We’ve been doing this since about 2 years after we graduated from college. Over the last 15 years our combined income has increased 6x, but we’ve been judicious in the raises that we’ve given ourselves, so we now spend about 2x what we spent back then.

    2. Track your net worth. People respond well to indicators. When cars have mileage gauges, people tend to try harder to save gas. Tracking your net worth monthly will probably make you work harder to make that number go up.

    When we were younger, I used to make ‘thermometers’, like the United Way uses to show fundraising progress. I tried to use that to motivate us to save. It worked for me, but annoyed my wife :). But just tracking progress in a spreadsheet has been a big motivator for both of us. I now have 13 years worth of monthly net worth history. It’s fun to look back at our investment decisions, expenses, etc.. and look at how they’ve impacted our present situation. It’s really an eye-opener.

  • krantcents September 5, 2012, 4:37 pm

    If yo keep a very rigid lifestyle, you are more apt to break the budget. In my younger years we got together with friends more and brought some food to the party. We still do, but we go out occasionally too. I travel overseas every two years. You need a lifestyle you can live with for the long term.

  • Darwin's Money September 5, 2012, 7:18 pm

    Much has to do with your spouse as well. Much easier to control your own rate of inflation but when you have a partner that’s more into keeping up with the Joneses, it’s impossible without agreement.

    • Mike September 6, 2012, 5:21 am

      I totally agree with you Darwin. It can be something that makes it a lot harder to be able to set yourself up for an early retirement (or retirement in general) when one of the spouses that is more interested in what possessions that they can get.

  • Travis September 6, 2012, 11:26 am

    I turned 30 earlier this year and my expenses are pretty much the same as they were in college (about $1,000/mo in college and $1,200/mo now).

    I bought my house (paid cash to build it) when I was 22 — the year after I graduated college. My old one bedroom apartment was costing me $500/mo when I moved out. My 2,450 sq.ft. house costs me about $400/mo to maintain:

    $133/mo – Property taxes
    $34/mo – Property insurance
    $50/mo – Routine maintenance (landscaping, replace air/water filters, paint, etc)
    $200/mo – Set aside for larger repairs in the future (water heaters, A/C unit, etc) — collecting a little interest each month on this amount until I need it
    Total: $417/mo

    I do have a higher utility bill too. Over the last couple years, I have averaged $150/mo for all utilities (gas comes on one bill; electric, water, sewer, garbage, etc. come on another). My apartment used to cost me about $40/mo 8 years ago. Even assuming that stayed the same 8 years later (yeah, right), that tacks on $110/mo extra in expenses for moving from my 500sq.ft. apartment to my house. So, for my apartment I was averaging $540/mo and in my house I’m averaging $567/mo — $27/mo more. And, actually on a monthly basis, it is $173 less each month in outgoing expenses (remembering that I am setting aside $200 into an account for future repairs, but not actually using that right now).

    I know, there are opportunity costs associated with having my money tied up in my house. But, where else would I put that money right now? Getting 1% interest in a savings account? Getting 4% returns in the stock market over those last 8 years (and being incredibly stressed out when the markets tumbled)? I have an open line of credit on my house so I can tap into it when I need it. Normally it sits at $0 (and accumulating $0 in interest). When I do need to use it for a good investment (which I’ve done three times so far), I can use the money at 3.x% and only loan out as much as I need. No need to be paying interest on a $250,000 loan when I only need to use $75,000 for an investment.

    I have been keeping track of my income vs. expenses on a spreadsheet I put together since Nov 2010. From then until last month, my average monthly expenses have been $1,173.62. That is every penny I spent, including buying a laptop ($825) and having a small surgery in June ($1,500 out of pocket).

  • Jerimiah September 6, 2012, 12:57 pm

    I was looking at you posts and I think this is a great goal. I am 27 and feel that I am well on my way to a health retirement – albeit not at 40. I am the sole wage earner and we have three kids. I noticed that you stopped working but it appears that your spouse still generates income – can you really consider this retirement? I prefer to have my wife stay home with our children and have to delay retirement for both of us until 50 to make it work.

    • Kim September 8, 2012, 7:12 am

      I agree with you Jerimiah. The title of this blog seems misleading. It sounds like this is a family with a stay at home dad. Their diligence about saving and controlling spending allow them to have a one income family. I think a lot of the topics are relevant to helping people plan for early retirement. But unless your income to spending ratio is is very large, I don’t think it is realistic to be able to fully retire by 40. Maybe your 50s. The biggest barrier I see to retiring early is healthcare costs. Currently you need to save a lot of extra money for every year you are fully responsible for your healthcare costs/insurance ( ie… Not supplemented by an employer or the government).

  • Roshawn @ Watson Inc September 7, 2012, 1:15 am

    I’m with you. Lifestyle inflation can be a big threat to retirement. I think this is one area that I’m very sensitive to. The more I learn, the less lifestyle inflation appeals to me, yet we’re both at ages where it is VERY prevalent among our peers. Thus, sometimes we feel like we’re battling against what “everyone else” is doing. We certainly aren’t trying to be martyrs for the cause nor would it be fair to say that some things haven’t changed. Like I said, I’m sensitive to this.

  • nicoleandmaggie September 10, 2012, 5:46 am

    But… I like being able to buy whatever I want at the grocery store.

  • Slackerjo September 11, 2012, 4:06 pm

    I got a new way higher paying job last Dec and I told myself it was okay to spent $500. I bought some very fancy speakers for my PC, a sewing machine and sewing lessons. Grand total $460. Then I went back to living on my starting (2009) pay from my old job. The rest, into the bank it goes. My goal is to continue to work at my job but only 3 days a week and call myself semi retired!!! This is my motivator for NOT falling into the trap of lifestyle inflation.

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