(The Truth About Inflation, Part 1)

“I don’t mind going back to daylight saving time. With inflation, the hour will be the only thing I’ve saved all year.”
– Victor Borge

The Truth About InflationHave you ever gotten back into a VW Bug, like the one you drove in college? No doubt it felt strange, making you wonder how you ever survived driving around in that little tin can on wheels! Similarly, we may look at rotary phones, record players and our old “weekend fun” kit (consisting of a tote with a blanket, and a couple Frisbees) as charming museum pieces.

Now we’re older, more sophisticated, and we’ve got bigger budgets to prove it. We don’t leave home for a weekend outing in our SUV (with power boat in tow) without our Smartphones (with speaker system and music library loaded).

What is lifestyle inflation?  It 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.” And in an economy driven by consumer spending fueled by technological improvements, creativity and never-ending opportunities for new services, information and products, spending more comes naturally.

When we are in college we are happy to buy tennis shoes from Walmart and skin care from the grocery store. As we progress in our lives and typically make more money in the working world, we want improved quality. Status may become more important as well. Now the shoes have to be brand name and the skin care must come from a department store. The job the product does (whether from the grocery store or the department store) is similar, but we convince ourselves the higher expense is worth it in terms of quality, features, or what we imagine the product will do for us.

Even later in our lives, if our careers earnings allow it, we may buy a pair of Nike Air Max’s for basketball, a pair of Mizuno’s for running, maybe some Addidas for cross-training. Now our make-up comes custom-colored from a boutique, and we’ve got a day moisturizer, a night crème, a toner, and a moisturizer just for our eyes (from France) to go with it.

“Youth is the time of getting, middle age of improving, and old age of spending.”
-Anne Bradstreet

The increased costs of the 3 phases – college, young professional, seasoned careerist – see our costs first quadrupled, then increased tenfold or more.  This is what we call Lifestyle Inflation. Lifestyle inflation causes us to transition from a $3 face cream to a $50 anti-aging moisturizer over a 30-year time frame, representing a 9.8% annual increase, whereas during that same time, “inflation” as defined by the government might only be 3.5%.

It is interesting to note that neither athletic shoes nor skin care fall into any of the government’s “basket of goods and services” that are identified as necessities. While we understand things change and technology renders certain items obsolete (think Blu-Ray players replacing the DVD player that replaced the VHS player that used to be a “luxury,”) we have to be aware that lifestyle inflation is above and beyond the basic inflation rate calculated by the government. (Or mis-calculated, as we’ll explore next week.) Lifestyle inflation is a whole ‘nuther “basket of goods and services.”

The Uncalculated Costs of Lifestyle Inflation

“Spending is quick; earning is slow,” says the Russian proverb. And for most people, spending comes much more easily than earning, saving, and investing. But the costs of lifestyle inflation run deeper than the immediate effect to a bottom line.

One cost is that of the emotional as well as financial stress. In our consumer culture, many have the feeling they are running like a hamster on a wheel. Our income increases, and so does our spending. We take on a bigger mortgage, a higher car payment, put our kids into a private school, and voila – we’re trapped on the treadmill.

One advantage of financial prosperity is that it gives us choices. Options. Freedom. But if we raise our lifestyle to compensate for the income burning a hole in our pockets, we’ll never have the experience of true financial freedom.

It is natural to want to spend what we earn (or most of it) – but it’s not necessary. The wealthiest people are those who live well-below their means… the “millionaires next door” who drive used cars and live in middle class neighborhoods.

Got Debt? Last week our post explored why people don’t pay off debts. For many people, lifestyle inflation is one reason. Others may have no consumer debt, but lifestyle inflation can significantly hinder their wealth-building efforts.

What about opportunity costs? One of our 7 Principles of Prosperity is to measure opportunity costs. What this means is that Lifestyle Inflation doesn’t just cost the difference between the Volkswagen and the Lexus; it costs the difference plus the money that difference could have earned in years to come!

Five Ways to Conquer Lifestyle Inflation

Treat Your Dollars like Seeds – Not Fruit. Seeds you save for planting, fruit gets eaten and disappears! It is said that Warren Buffet wouldn’t give you a friend a quarter if she only needed a dime for a phone call, he would make change and keep the extra 15 cents. For him, the joy of money was never in the spending of it, but in the multiplying of it. Indeed, a mere dollar will eventually grow into a million, given enough time and the right strategy.

Lead Yourself Not into Temptation. Why do you think the IRS collects taxes before you even see the additional amount in your paycheck? So you don’t spend it, of course! In the same way, force yourself into saving through automatic withdrawals, mortgage payments and whole life cash value accounts. (This insures that your future self will have some options for skin care and tennis shoes.)

Save Your Raises. The next time you experience an increase in income, consider how to save the difference rather than spend the difference. This is not only a smart financial move, but it will increase your options and lower your stress should your income ever take a turn the other direction, through circumstance or choice.

Get Real About Priorities, Values, and Needs Vs. Wants. Get clear on what you want money to DO for you. What’s truly important to you? What are your top priorities, and if someone looked at your bank account, would they find clues? Strive to align your spending with your values.

Want to drive a nice car, or take the family on a vacation to remember? Please do – but be smart about it. Watch your movies at home and pop your own popcorn to save up for those Broadway show tickets, or perhaps purchase a new car (or a car with 10k miles on it) once every five years instead of every 3 years. See how else you can afford the splurges you enjoy the most without compromising your ability to build cash-flowing assets.

Practice Gratitude and Contentment. Instead of letting catalogs and online shopping keep you in a constant state of comparing yourself with the Joneses, enjoy what you have. The latest game station isn’t necessarily better than a monopoly board – just different. Love what you have, and realize the Joneses are secretly jealous of your life’s simplicity and your lack of consumer debt!

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