Avoiding the Lifestyle Inflation Trap

Left unchecked, there’s one thing that’s almost certain to happen in the lives of most people as they grow in their careers:

The more money you earn, the more money you will spend.

This is the core concept of lifestyle inflation. It’s a difficult trap to avoid. Preventing growth is easier than downsizing later in life.

Purchases that tie us down for years are the hardest to handle. Student loans, home purchases, and cars are the leading limitations, but health care expenses can be a burden with a single emergency while uninsured.

My Lifestyle Inflation

When I think back on my own life, there are glaring truths in this:

• Buying a house after getting a stable job.
• Filling the house with furniture.
• Maintenance and service on a house.
• Taking international trips rather than driving and camping.
• Shopping at a local grocery store rather than Walmart.
• Buying a car that’s fun rather than a car that’s economical.
• Getting new electronics before their lifespan has expired.
• Going out to eat rather than eating in.
• Eating and drinking more expensive meals out, rather than fast food.
• Drinking out.
• Buying things because they’re “on-sale”.
• Developing expensive hobbies — photography in my case.
• Going out rather than staying in.
• Pre-purchasing books, and other consumables.
• Art, decorations, and home improvements.

While a number of these areas are places that I could improve on with mindfulness and planning, some (like owning a house) are sunk costs with a much more difficult transition.

For the last decade, I’ve been tracking my personal expenses. This has meant a few things. First, that I understand how much more I’m spending now — for better or worse. Second, I have an understanding of which areas have grown out of proportion with others.

Based on my personal experience, here are some of the tips I wish I had known for helping to avoid lifestyle inflation.

1) Don’t Buy a House During a Bubble

I bought my house in 2008. It’s pretty much the worst possible timing for a home purchase in history. Unfortunately, I have no idea of how you could know when a bubble is happening. I have suspicions that bubbles are happening in some exploding real estate markets (like Seattle and Portland), but ultimately I’m as clueless as anyone else. If you see everyone buying houses and everyone is saying you need to buy a house, maybe that’s a sign you shouldn’t. On the bright side, I never hear people saying “Real estate always goes up” anymore.

2) If You Do Buy, Buy Below Your Means

If you do buy a house, you’ll likely be limited in how large a house you can buy to where debt makes up no more than 43% of those on the mortgage. If you’re paying 43% of your paycheck in debt, you’re in a not-so-great place, and preventing lifestyle inflation is likely less of a problem than debt reduction.

As far as what percentage I’d recommend — the lower the better. If you can get under 15% that’s a sweet spot to be in.

3) Live with Someone Else

Living with a significant other is one thing, but I’m referring to living with someone else who can take some of the financial risks of your residence. One way to do this that BiggerPockets advocates are by buying a duplex or triplex and renting out the other residences. In addition to potentially having your mortgage paid by renters, many of the home improvements and related expenses suddenly become tax deductible as a business expense. (note: the tax deduction side isn’t possible unless they are a tenant)

4) Keep Track of Your Expenses

What gets measured gets improved. If you can keep track of your expenses, you’ll have a great benchmark to know how much you’re spending in certain areas. That will give you the understanding to start trying to lower them.

5) Save Before You Spend

Save what you spend, and save a LOT. If you’re not saving at least 25% of your income, then I strongly recommend seeing what you can cut or change to up that number. Saving 25% means you could stop working in 32 years, but saving 50% cuts that to 17 years. Above 50% speeds things up even faster. The less you’re spending, then the more you’ll save as you earn more in your career and the faster you’ll reach financial independence.

By keeping expenses low, while earning more over time, suddenly saving 50% doesn’t seem as crazy. In 2016 I ended up saving about 40% of my income, and I’m hoping to increase that number in 2017 (but with a wedding and a honeymoon on the agenda we’ll see ????).

6) Wait On Large Purchases

Many large purchases get cheaper over time. That new TV that came out is going to be half the price in a year. The same is true for that most video games, electronics and anything you can find used. Often these items have much more character than the shiny and new versions you’d get from a store.

7) Understand the Opportunity Cost Of Purchases

Building the lifestyle you want is important, and these recommendations shouldn’t derail that. I could drastically lower my expenses by moving into a smaller house and not traveling — but I would be far less happy. I’ve decided to make that tradeoff, and I understand the difference in the number of years I’ll need to work due to that decision (it’s around 5 years more work to include these additions in my life).

Be Money Mindful

Being mindful of your expenses, letting time go by, thinking like an investor and doing your research can go a long way toward preventing lifestyle inflation. The one similarity that stands out to me with all of these is being patient. If you can develop patience and delayed gratification, it will go a long way toward preventing lifestyle inflation.