“Keeping up with the Joneses? Don’t – most of them are flat broke.”
—Steve Adcock, Think, Save Retire
Homes, cars, healthcare, groceries and a college education all cost much more than they used to. Thanks to inflation, the price of goods and services increases while the purchasing value of our money decreases. But another type of inflation that may have an even greater impact on your finances: lifestyle inflation.
Lifestyle inflation is the natural tendency of human beings to desire improvements. As one blog defined it, “Lifestyle inflation is the unnecessary expansion of spending to match an increasing income.” We especially see it’s effect over time. Let’s look at some examples of lifestyle inflation.
In the 1970’s, telephones were attached to the wall with a cord—sometimes physically as well—and only used for phone calls. Mobile phones did not exist in the public sector. And there was no internet.
Televisions had fewer than 10 channels and color became the norm only after 30 years of black-and-white. College papers were typed—with a typewriter—onto paper. Editing required white “tape,” liquid paper goop, or retyping entire pages or chapters. Electric cars were a fantasy. If you wanted go shopping, you drove to the store or mall. Coffee cost 75 cents and options included cream and/or sugar. (No double grande caramel mochas with almond or coconut milk!)
For better or worse, it was a simpler time with fewer options.
Now phones have cameras, video players, endless apps and internet connectivity for streaming yourself on social media, filing your taxes, or ordering an Uber ride! As tech reviewers debate whether the iPhone 11 is worth the $1k+ price tag, it seems a good time to ask: how many relatively recent products or experiences are now “needs”? And what is the financial impact of these ever-expanding necessities?
Move over CPI: Lifestyle Inflation is a Bigger Problem.
“Youth is the time of getting, middle age of improving, and old age of spending,” said 17th century poet Anne Bradstreet. Hundreds of years later, not much has changed. We transition from college bootstrapper to young professional to seasoned careerist, then, perhaps, to someone who can afford all the luxury money can buy.
The Consumer Price Index has been hovering in the 2 to 3 percent range for years (which can be misleading, but that’s a different topic). However, when groceries double over time, lifestyle inflation may increase tenfold!
Consumer spending is fueled by technological advances, creativity and endless options for new services, information and products. Improvements abound, and consumers happily foot the bill. As we grow older, our tastes become more sophisticated. “Camping” once meant a tent and sleeping bag. Now it requires an RV or an SUV (power boat in tow) with a host of tech gadgets for reading, music, and other entertainment.
In addition to the consumer culture and new technology and options, income is the other driving force of lifestyle inflation. An enlightening article in The Atlantic analyzed figures from the U.S. Bureau of Labor Statistics to discover spending patterns. They discovered that Americans tend to spend approximately half of their income on housing and transportation—no matter how much they make. Whether family breadwinners had a high school education and modest income or were college graduates earning twice as much, families spent about 50% of their income on cars and homes.
Incomes rise and budgets increase to keep pace. So forget the government definition of inflation; lifestyle inflation far outpaces the Consumer Price Index.
The Unseen Costs of Lifestyle Inflation
Spending comes more easily than earning, saving or investing. But the true cost of lifestyle inflation runs deeper than the impact on the bottom line.
One cost is emotional as well as financial stress. It’s the experience the feeling like a hamster running on a wheel. Your income might increase, but then you take on a bigger mortgage, a higher car payment, and send your kids to private school. Voila—you’re trapped on the hamster wheel!
Financial prosperity gives us greater choices and freedom. And though you may imagine “the rich” can spend what they wish, in truth, the wealthiest are those who live below their means. The “secret millionaires” among us drive used cars, clip coupons, and resist lifestyle inflation.
Debt is another debilitating result of lifestyle inflation. Consumer debt is rampant even with six-figure earners. And debt leads to regret and stress—while sabotaging wealth.
Then there are opportunity costs. One of the 7 Principles of Prosperity™ is to measure opportunity costs. Lifestyle inflation is much more than the difference between a Volkswagen and a Lexus. It will cost you the difference plus the extra money that difference could have earned in the coming years.
7 Steps to Conquering Lifestyle Inflation
If you recognize yourself in the cycle of spending more when you earn more, here are seven ways to combat lifestyle inflation.
#1: Get Real About Your Needs Vs. Wants.
Define what it is you want money to DO for you. What matters most? If someone looked at your bank account, would they find clues to your top priorities?
The consumer culture wants you to spend every last penny you earn. Learn to decline the invitation. Decide what’s valuable and important to you—and spend accordingly.
You can drive a nice car or take your family on a vacation to remember, but be smart about it. Where can you cut back? We enjoy movies and cooking at home to save up for the bigger expenses. We have also purchased gently-used cars and driven them for years. Get creative so you can afford the splurges you enjoy without feeling trapped on a hamster wheel or sacrificing your savings.
#2: Control Your Spending.
Lead yourself not into temptation. Know your triggers for spending and especially, for overspending. Then see how you can change your habits or behaviors to get a better result.
My co-author Kate used to buy things—things she rarely used—on impulse. Now if she wants to buy something on a whim, she has strategies to interrupt old habits. This and other strategies she describes in “7 Ways to Stop the Shopping Addiction” have helped her and others regain control of spending.
#3: Save First.
You may have heard that you need goals and budgets and software to succeed at saving. While these tools can be helpful, there’s only ONE necessary step for saving success: Save first—then spend the rest.
There is a reason the IRS collects tax before people receive their paychecks: so you don’t spend it first! Similarly, you can reinforce your savings habits through automatic withdrawals. If you leave money in your checking account, you’re more likely to spend it! Instead, move money from checking into a savings account or cash value life insurance policy. (Contact us for specific recommendations of what kind of policy.)
We like to say, “life insurance is like a savings account that shows up like a bill.” Just as mortgages help former renters purchase and build equity in a home, so a properly-structured whole life policy can help you build long-term savings while also managing risks. And one thing we love about this type of policy is that it has a long history of out-performing other safe money options such as money market accounts, bank accounts, CDs, and treasury bills!
#4: Save More.
If you are just getting started saving, try to save at least ten percent of your income. If you are already saving ten percent, stretch yourself to fifteen or twenty percent. Some couples even find a way to live on one income and save the other! But the biggest trick is saving first—before you spend.
#5: Save Your Raises.
When your income increases, save rather than spend the difference. Not only is this a smart financial move, it will be invaluable should your income ever decrease due to circumstances or choice. Of course, you can still splurge on occasion or to celebrate your raise. Just don’t keep ratcheting up your spending every time your income increases.
#6: Save—then, Invest!
It is said that Warren Buffett wouldn’t give a friend a quarter if she only needed a dime for the pay phone. He would make change and keep the extra 15 cents! For Buffet, the joy of money was never in the spending of it, but in making it multiply. Given enough time and the right strategy, even a dollar can grow into a million.
As you grow successful investments, you’ll also become more motivated to save and invest! It is essential to have a strategy for multiplying your dollars.
Saving is the best first step, as mentioned above. Once you have saved up a healthy emergency fund and have lump sums to invest, start looking for opportunities!
We recommend focusing on two kinds of investments:
- Growth investments—preferably investments that won’t roller-coaster ride with the stock market.
- Income investments that will generate reliable cash flow.
People focus on cash flow investments in retirement, but there is no need to wait until you wish to cut back on work! Learn to generate cash flow and you’ll build confidence in doing so.
#7: Practice Gratitude and Contentment.
Finally, know that prosperity begins with your thinking—the first Principle of Prosperity! Gratitude and contentment help unwind the part of us that strives for “More, more, more!” Don’t allow catalogs, online shopping or Instagram keep you in a constant state of comparing yourself to the Joneses. High-tech games and toys aren’t necessarily better than dominoes or a game of cards, just different. A luxurious hotel isn’t better than a national park… just different.
Realize that the best things in life cannot be bought or sold. Appreciate each day and the people and/or pets you enjoy your life with. Stay active, especially in nature, if you can. And remember—it’s completely free to practice kindness, prayer, meditation and gratitude. Love what you have and consider that the Joneses might be secretly envious of your ability to build wealth!
Our passion is helping you save and invest.
Find out more about using life insurance for savings and protection in our best-selling little life insurance book, Live Your Life Insurance. It explains why whole life insurance is so much more than “death” insurance! Then contact Partners for Prosperity for a personalized illustration of this flexible, guaranteed savings vehicle for you.
And if you have saved well and are ready to invest, we can recommend cash flow investments or growth investments for your situation. Email JoeJ@Partners4Prosperity.com to get on Kim’s calendar.
—By Kim Butler and Kate Phillips