Lifestyle Inflation

This is a guest post by Robert, who lives in Calgary and worked as a financial adviser before retiring at age 35. He is married, has three kids and has returned to school with the goal of eventually living and working overseas.

Summer vacation is great. The weather has been really good and it was fun to get away with my family for a few days. However, it means spending beyond what we normally would. Staying in hotels, eating in restaurants and playing on waterslides, we ended up spending far more money than in prior months. It was definitely worth it, but it reminds me that it’s easy for spending to get away from us.

Summer vacation isn’t the only time that spending can run away with us. Christmas, birthdays, holidays, celebrations, or even just “retail therapy”. In fact, whenever there’s money left at the end of the month, it’s tempting to splurge on some of the things we’ve been wanting to buy. One of the things that surprised me the most, as a financial advisor, was people’s answer to the question: “How much do you spend each month?” Many people would look surprised by the question, totally unsure of the answer and end up blurting: “All of it.”

When you earn $2000 per month, it’s easy to spend all of it. When you earn $5000 a month, it’s easy to spend all of it. And I’ve seen people who earn $10,000 who have no problem spending all of it. I suspect that most of us have a bigger imagination than our capacity to earn income; there’s no shortage of creative ways to spend it all. One of the decisions I made early on was to try and keep my spending steady, even while my income rose. In reality, my spending increased a bit, but less than my income. That’s what allowed me to save a large proportion of my income. If I had, like some people, spent it all and waited until I was 45 to start saving, it would have been much more difficult because of the spending habits that are in place by then. Also, income tends to increase more slowly, sometimes only keeping up with inflation. This may be a reason that there’s so much focus in personal finance literature in reducing and restraining spending.

If you start early, it’s far easier to save a large portion of each increase. If your income rises by $500, start an automatic savings program of $350 and spend the other $150. That way, it still feels like an increase, and you’ll also make progress toward your goals. After all, he who dies with the most toys, still dies.

How do you find money to save? Do you save regularly, or sporadically as money is available?

8 thoughts on “Lifestyle Inflation”

  1. I had both an automatic savings program (i.e. a percent of my pay going to my 401(k)) and simply saving any excess of income over expenses. While I contributed into my 401(k) up to the compny match, for about 18 months in the mid-1990s (before the Roth IRA) I saved some after-tax dollars into my 401(k), too.

    It was easier to have more excess of income over expenses as I paid down or paid off my debts such as student loan and mortgage in my younger years. I avoided cedit card debt and never had a car loan, either.

  2. deegee, you make a good point. As debt payments end, that money becomes available for either spending or saving. When I advised people who were nearing the end of their mortgage payments, I usually suggested continuing the payments, but directing them into their investment accounts. It’s like paying yourself, and it makes a big difference. Thanks for the comment!

  3. Right now, everything I have is going to non-mortgage debt re payment. When that is done, I’ll split those payments between my mortgage and saving/investing, depending on the interest rate landscape.

  4. Sheryl, that sounds like a very wise plan. It sounds like you’re paying off the smaller, higher interest loans first, which will help you make faster progress. Also, I think it makes a lot of sense to split payments between mortgage and saving/investing. The mortgage needs to be paid off, but with a little luck, your investments will earn a higher return than your mortgage costs. (It might take a little shopping around.)

  5. We budget all of our saving and spending so how much we get to spend per month is a non-issue. We’ve both gotten salary increases this year as well, and we just tweaked our budget to increase our savings to reflect the change.

    I did give ourselves a little bit more short term savings on fun stuff (trips, sports, etc) but I am hesitant to give ourselves more free spending money due to lifestyle inflation.

  6. I budget my required spending and savings, which are siphoned off into specific accounts for those things, then whatever is left over is fun money that I put into the checking account to spend however I like. It took me a long time to get used to saving first and then spending what was left over rather than the other way around, but now I’m on track.

  7. Tara, it sounds like the “pay yourself first” rule works for you. It was also foundational when I started budgeting. For a while, I spent what was left on fun things, like you do. After a few years, however, I discovered stock market investing, and my wife and I ended up wanting to buy stocks with “leftover” money. It worked out for us financially, but we are kinda geeks 🙂

  8. I guess I’m not very creative as I have no idea how I’d spend all the money I earn. Same with my husband. We’re opting for some lifestyle inflation by buying a new car this year, and a house soon, but we still should be saving around half our take-home (counting the money that will become equity in the house). It helps that most things I like aren’t very expensive and I’ve never got into the habit of not saving money.

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