Rule #1 of Personal Finance: SPEND LESS THAN YOU EARN!
This is going to seem like a pretty dry and mundane introduction, but it’s important to go back to the ABSOLUTE basics sometimes. Quite literally, everything else relating to personal finance has roots going back to rule #1. The degree to which you follow Rule #1 determines the gap or the surplus between what is spent monthly and what is earned monthly. Honestly, if you follow only rule number one, you are doing better than many who outspend their earnings (securing themselves a bankruptcy or a lifetime of interest to be paid). What this article is specifically focused on is so sneaky you almost need to document it to see it clearly. It is sneaky and it is insidious. The problem is that it is so abundantly available to make a part of your life it can sneak into your life like a spider sneaks into a home. Nearly every advertisement, billboard and business on Main Street offers a way for you to participate! What is it? Lifestyle Inflation.
Sneaking, Leaking and Snowballing
Lifestyle creep or lifestyle inflation is what sneaks in or parades into your life as you increase your cashflow. You can increase your cashflow by paying off debts, cutting expenses or increasing your take-home pay. Lifestyle inflation drags your outgoing expenses up closer and closer to your income thus removing your ability to save money and pay off debt. No matter how it enters our life, we must account for this inflation and either eliminate it or plan for it to whatever degree we want to take Rule #1 to. Ultimately, the less we spend, the faster we can reach financial stability and peace.
Since the time that we began to get our finances in order up to the present day, we now have a healthy surplus between what must go out and what comes in. The danger now lies in what we should do with this surplus. We must be careful not to slowly revert back to our old habits of unconscious spending and adding new expenses without careful consideration and budgeting. The whole idea, as with 99% of personal finance, is to be intentional with your money. I honestly think that a few years ago I spent more time trying to figure out what I wanted to order at the local Chinese takeout place than I did on our finances. I went to work, the money landed in the checking account and the credit cards were set to get paid. No problem, right? Wrong.
We’ve found that lifestyle inflation generally has 3 classifications, so we listed some things we’ve found in and around our lives that fit into each:
Necessary Inflation (Can’t be helped):
Insurance Premiums Go Up
National Economy Inflates
Cost of Living Increases for Necessities
Subtle Inflation (Drops by quietly):
Data Plan Cap Increase
Eating Out 1 More Time a Week
Switching to Brand Name Merchandise with Higher Cost per Unit.
Online Subscription Services
Gasoline Price Increases (Combined with Leisure Traveling)
Blatant Inflation (Kicks down the door looking for the party):
A Brand-New Car
Larger Home on the Costlier Side of Town
“Toys” with Payments
Designer Clothing and Accessories
Good habits can create dollars, but dollars seldom create good habits. Using dollars to create a bad habit will usually chain bad habits together. By being aware of your spending (with a budget), eating food prepared and cooked at home (as opposed to eating out every day), by securing reasonably safe and economical transportation (as opposed to a brand new leased BMW or Full Size Pickup with a loan) or choosing what entertainment is worth paying for and ditching what you don’t use, the good financial habits will slowly over-time pickup traction as you work on bettering your financial situation. Good habits can also help form other good habits. For example, eating healthy foods at home typically will have fewer preservatives and salt thus helping to have fewer medical bills now and down the road. The problem here though is that bad habits can potentially create other bad habits. You don’t use a budget, so every month you use a credit card or a payday lender to bridge the gap. Relying on these institutions will be detrimental to any progress that is to be made.
The great part about snowballing or avalanching your debt (we’ll cover both methods in a later post) is that it will free up dollars previously committed to other things in your life. This is especially true with the debt snowball. Once the snowball has bowled over a couple of debts, money begins to be freed up, and the possibility of lifestyle inflation comes into play. Now that you have some money that wasn’t there previously, it’s tremendously important to give those dollars a job. Money sitting around without a defined purpose tends to be spent frivolously. Immediately put the money that’s been freed up back to work for you and either pay off more debt, save for a rainy day or define a goal for it to be used for and apply them to that.
So, what to do?
First, start saving all your bank account and credit/debit card statements (include PayPal and any other payment method you can track that you frequently use) for a few months or gather previously received statements. Next, cross off anything that you recognize as being 100% necessary and unable to reasonably change the expense amount (mortgage/rent payment, utilities, etc…). What is left should be all the items that are either individual purchases or recurring expenses that are going out every month. Go line by line and purposely think about each and every one. Have you used or consumed this item/service? If you have, did any of it go to waste or are you paying too much for what you use? If you used it all, is there any way that you can secure or obtain the same item/service or something functionally similar and save money? As you evaluate each item in your statements, you’ll have a hindsight 20/20 view of your actions. Use this advantage to weed out or trim back anything you have too many of, you no longer use or you don’t recognize.
Finally, save past documents, plans and budgets (especially budgets) to compare to over time. This is the absolute best way to track budget creep and lifestyle inflation. This was eye opening when we did it. We were going through a stack of papers that we had quickly packed at our apartment and I found one of our oldest budgets. It was amazing to see the progress, but also how some fluff was added back in when it shouldn’t have been. It wasn’t just new things, but others expanded. For example, now that we weren’t feeling quite as much pressure living paycheck-to-paycheck, we started eating out more (before we had DRASTICALLY reduced the amount we ate out). Additionally, we adopted a dog in this time. Now, there isn’t too much you can do because he needs to eat and see the vet, but other areas of the budget had to compensate for this. The money we were spending eating out became the money we used to pay for Maverick’s expenses. Additionally, we used to get Netflix DVD subscriptions… until we realized we were just letting the DVDs sit for a few days to a week and eventually maybe watching them before sending them back so they wouldn’t get lost. What a waste! Even though it was less than $10 a month, every little hole in the bank account matters. The whole idea is to eliminate as many leaks as you can to stop this unnecessary inflation in your life so that you can be where you want to be in 10 years rather than wonder why you didn’t reach your destination. Even a small leak in your car’s gas tank on a long trip may leave you stranded in the middle of nowhere.