Slowly but surely, lifestyle inflation will creep up. It has the potential to ruin you financially, burying you in piles of debt and keeping you from your long-term goals. An undeniably real thing many college grads will experience (including me) is the rush of going from an internship or job in college (or no job) to suddenly having a steady paycheck, paying you more money than you’ve likely earned in your entire life. If you’re not disciplined, there’s a good chance that you’ll soon grow accustomed to your new-found income; by itself this isn’t bad, but as you continue to earn more, it leaves you in a position to start racking up debt and buying stuff just because you “can”.
If you want to retire early (or maybe even at all), nipping lifestyle inflation in the bud will help make sure that you can live an enjoyable life now and also hit your goals. Here are four simple ways I use to make sure that lifestyle inflation doesn’t get the best of us:
Quit comparing yourself to others
There’s only one person you should be comparing yourself to, and that is yourself in the past. Keeping up with the Joneses is a surefire way to spend more than you save and let lifestyle inflation in. When that neighbor has that shiny new toy, something inside of us envies that and makes you want it. It’s human psychology; you want what you can’t have. Whenever I want something that I deep-down know I can’t afford or shouldn’t buy, I think about what it means I need to give up in return.
Take for example the neighbors who roll into their driveway on a Tuesday night with a brand new Mercedes fresh off the production line.
If the only person you’re comparing yourself to is yourself, then you’ll be less likely to care about what your neighbors have and more likely to care about making sure you’re making progress on your goals. Doing this also means caring less about stuff and caring more about what provides meaning and value in your life – likely things like friendships, relationships, and experiences over having the latest iPhone or Mercedes.
Which brings me to my next point…
Skip the lease or new car, and buy used
Americans buy an insane number of cars with debt. $1,000,000,000,000+ in auto loans is a staggering number, and financing a car – or leasing one – is putting yourself on the hook for a depreciating “asset” (some would say cars are actually a liability). I’m not recommending that everybody totally skip the car and take public transportation or bike everywhere. If you can do that, great. It’s an awesome alternative, and walking/biking will help you stay in better shape to boot. But quite frankly it’s just not realistic.
Buying used, however, is very realistic and will save you thousands and thousands of dollars, especially when you repeat that process every time you need a new car. I bought my car lightly used back in 2011. I chose a newer vehicle than what I probably could have gotten away with, but we’re now down to 1 car between the two of us and have no immediate plans of buying a second one. Making the conscious effort to figure out our schedules on one vehicle was a little bit tricky, and it’s not always the most convenient thing. That’s where Uber/Lyft come into play.
Instead of making a $300-$500 car payment, you could instead use that money for a number of things like beefing up your emergency fund or investing. Paying more than you need to for a car is one of the easiest financial mistakes to make, especially if you go to college and land a nice “real” job afterward, but staying within your means and paying cash for a decent used car will put you in a much better position down the road.
Bank your raises, bonuses, and tax returns immediately
If you get a raise or an annual bonus at work, or you get a tax refund, saving it instead of spending it will make sure you don’t count on it as part of your ‘regular’ income. These things aren’t guarantees. While nothing really ever is a slam-dunk, raises, bonuses, and tax refunds are rarely things you can rely on with much consistency, so it makes sense to treat them a little differently.
Admittedly the raises will be a little more difficult to deal with in this way psychologically, but they’re actually pretty easy from a mechanics standpoint. If you get a raise that increases your bi-monthly paychecks by $75 each, just adjust your automatic savings up by $150 once the raise kicks in. At first this may seem to be totally against the point of working hard to get a raise, so starting it at something like $100 will let you enjoy a little bit of your raise now and still move you ahead on the savings.
Be as aggressive as you can with these; the more you can save now, the more you’ll be able to enjoy compound growth and the freedom your money buys you later. The same goes if you get a new job in which you’re making more money. If you go from a job making $50,000 a year to a new job making $65,000, your paychecks will undoubtedly increase; make sure you up your savings if you don’t want to blow your extra income on something silly.
Increase Your 401(k) Contributions
This is one of my favorite secret weapons. If you have a 401(k) (or similar) retirement plan through work, it’s an easy trick. In addition to bumping up your savings when you get a pay increase, bumping up your 401(k) contributions by 2-3% each year will help you inch toward your goal. At some point, you’ll be able to max out your 401(k) and, since the change is gradual, it’s likely that you won’t feel it too much in your take-home pay. Doing this will help you sock away $18,000 each year, and the sooner you start the better.
This isn’t exactly the quickest way, but it’s definitely effective. Make sure that at a minimum you’re always contributing at least the company match (if applicable), and then bump up each year after that.
What tips and tricks do you use to combat lifestyle inflation? Do you have specific tools you use or is this purely a head-game?