Nov 19, 2008

Are you Managing Your Lifestyle Inflation?

Have you ever heard the one about the graduate student who ate beans on toast for 4 years whilst completing his degree, accepted a top-class job with high prospective pay increases but even after 10 or 15 years of working never seems to have any more money in the bank than he did when he was studying as a poor lowly student?

Okay, I made this person up but the reality is that most of us know one or two people who are exactly like this. They are earning lots of money, in some cases more than you, but they never seem to actually have any. Yes, they have great cars or a big fantastic house but they always complain about owing so much on maxed out credit cards.

This could also happen to you if you're not careful. You see, these people are victims of Lifestyle Inflation.

What is it?

They Taste Even Better Than They Look!
Photo: sis

Lifestyle Inflation is something that happens to all of us at one time or other. It happens when we start working, it happens when we get a pay-rise and it can happen at almost any other time of our lives too if left unchecked. It's that function of our income which makes us say "Hey, I can afford that because of my new pay-rise" so you go out and spend the extra money on that new 'thing'. Because ... you know ... you're worth it!

It also has another phrase, one that is probably more well known than Lifestyle Inflation. It is also know as:

The more you earn, the more you spend.

You've definitely heard of that one.

Now, I want you to sit back, relax and have a think about what you did the last time you got a pay rise. I'll wait right here until you come back. Think of a few things. To help you out, you might want to consider whether you:

  • treated yourself to a nice meal out
  • splurged on new clothes, make-up or shoes
  • subscribed to another magazine
  • raised your cable subscription to the next level up
  • increased the amount you set aside for socialising
  • went out and bought a new car

If you can tick a few of these or maybe you have some of your own, then you are inflating your lifestyle.

So what? I deserve it

Of course you deserve it, you work hard for that money. That increase didn't come without having put those extra hours in, being good at what you do and finding a good position within your company. All that extra work you put in for that pay rise was worth it in the end and therefore you feel you deserve to spend it on whatever you like.

By all means treat yourself but do something low-key as a one off rather than expensive and continuous. That way, at least it is somewhat contained (and also, you need to treat yourself every now and again, otherwise you'd probably go a bit mad).

The Paradox

But here's the crunch. Yes, you put all that extra work in, your skills have increased and you're worth much more in your field of expertise but how does that benefit you if you spend all of that extra? Especially all that extra on something you have to pay every month for a very long time.

Think about it. Your employer is paying you more as recognition that you have improved both yourself and the company. But you're not recognising yourself. If you go out and spend that extra money in your paypacket every month, then you're not actually giving yourself a pay-rise.

Those extra car payments per month might come from your pay-rise but it's basically wiping that pay-rise out. What you end up with in your pocket is the same - or possibly less - than what you were getting before!

This doesn't make any sense. It means you're more valuable, you're earning more and you're being recognised but the end result is that you come out the same at the end of the month.

That doesn't make sense to me (and yes, I've been guilty of doing this in the past).

How to Stop It

Essentially you need to stop it by not allowing yourself to spend that increased pay-packet. Much like the old phrase PF bloggers like - Spend Less than You Earn - another one can be added to that list:

Don't Increase your Spending at the Same Rate as your Pay

There may be one or two things you want to spend extra on, possibly those things you've been holding out for for years but be careful not to spend every single extra penny you take home. If your expenses increase at a lower rate than your pay-rises, then you'll be doing well.

Of course, if your expenses don't increase at all when your pay increases, then you're doing even better. This is easily done by not altering any of your expenses budget but instead adding that pay-rise straight onto your savings budget.

Lifestyle Deflation

Recently, I have been a victim of a lifestyle change but happily for me, it is in the other direction. I have no idea if there is such as thing as Lifestyle Deflation but I think this is what I have been doing recently.

I recently chose to stop, cut out or cut down a number of my expenses and hence, even though I didn't get a pay-rise at the time, it sure has felt like one. It was a random time to do it but after almost three months I am already feeling the benefit of it.

To finish off, you might also want to consider what areas of your life you can downsize, cut out, do without, sacrifice or even just spend less on. You'll be surprised at how just a few things here and there add up to a fair amount of saving each month.

Oh, and by the way, the first places to look are those things you recognised earlier as contributions to your Lifestyle Inflation. If you didn't have these things before then you can probably still do without them now.

What is on your 'Lifestyle Inflation' list? What can you cut out to help with 'Lifestyle Deflation'?

7 comments:

Chris said...

Andy, interesting article. The line that stands out to me:
Think about it. Your employer is paying you more as recognition that you have improved both yourself and the company. But you're not recognising yourself. If you go out and spend that extra money in your paypacket every month, then you're not actually giving yourself a pay-rise.

I would question why simply having money is the end goal and no gaining the lifestyle improvements that come with. Is money in the bank an end unto itself, or simply a means to get to some end.

Life is about excitement and fun. If money can enable you to do things you find fun and exciting, great - spend away!

I think a more natural premise to your argument is that the lost time spent working longer hours that generally comes with a pay raise inhibits your ability to enjoy your new wealth in a meaningful way, hence the desire to spend money on lavishly unnecessary shit.

- Chris

retire-at-40 said...

@Chris:

You're right, it's silly not to enjoy yourself, especially if you get some extra money. My overriding point however about not spending everything you get extra still stands.

You'll realise that this blog has other themes over and above Personal Finance and one of those is about lifestyle. My desire to retire at 40 is as more about lifestyle and that can only be fueled by Personal Finance ... it's a means rather than an end, so yes, simply having money as the end goal is not one of my goals! It is driven purely by the lifestyle I want :-)

Early Retirement Middle Way said...

Great article--very well put. I tend to put 50% of it towards debt and the other 50% towards savings.

I'm usually saving for bigger lifestyle goals so it's never hard to find a place for extra cash!

Retired Syd said...

Lifestyle Inflation. I love it, it describes it exactly!

I retired 8 months ago at the age of 44, and I attribute one of the factors to my success getting there, to be my husband losing his job. Yep, that's right. When he lost his job 5 years ago, we deflated our lifestyle, just as you describe. And guess what, the world didn't end and we were HAPPIER with him not working and us having the deflated lifestyle.

That's why I knew that 1) I wanted to stop working permanently too, and 2) we could easily deflate again--all that stuff that we bought with all that money didn't make us happy. Most of it was just for convenience -- having a lot of extra time saves a lot of money, you just do a lot more yourself!

It's amazing the stuff we don't spend money on now--you reverse that trend of "I deserve it, I work hard," to "who needs it, I'd rather have the freedom!"

retire-at-40 said...

@Retired Syd:

I love getting comments like yours since I think we are both on the same wavelength. You're a few years ahead of me but that's awesome for you to be able to have the freedom - the freedom from work and the freedom from having stuff.

Good luck and well done. Glad you liked the post.

Moneymonk said...

"treated yourself to a nice meal out "

that's not inflation, if you are constantly doing this, well yeah it can be a recurring expense.

My question, how long do u expect one to live like a poor college student?

I inflated my lifestyle however, i earn more than I spend

retire-at-40 said...

@Moneymonk:

Good point about living like a poor college student. I'm certainly not living a poor college student's lifestyle so I guess I can't really answer your question. My lifestyle certainly has inflated since then but my point it to keep the inflation in check - which you seem to have done quite well.

There are many people I know who owe money, then they get a pay-rise and a few months later, they seem to owe even more money. It is this that I am warning against. Just to quote one sentence of the article (which you also did) which I also specifically put in quotes:

"Don't Increase your Spending at the Same Rate as your Pay"

By all means increase your lifestyle but don't let it inflate disproportionately.