I’ve written a lot on how to save money. After all, in order to build wealth you have to spend less than you earn and invest the rest. But often times, as we progress in our careers our expenses rise with our incomes. This is a phenomenon known as lifestyle inflation. Check out my most recent article for more details on lifestyle inflation.
So how do you avoid spending more as you make more? Below are 3 ways to help you keep your costs in check.
Know your costs
When I was in college, one of my professors said “You can’t improve what you can’t measure”. If you were trying to lose weight, you would step on the scale to see how you were doing. The same holds true for preventing lifestyle inflation. You need to know what your costs are in order to avoid unnecessary inflation.
This means tracking your expenses. Do you know how much you spend on food each month? What about on entertainment? Knowing these numbers each month will help you determine whether or not your costs are unintentionally going up.
David Bach, author of The Automatic Millionaire, likes to use an exercise where you tally up every single cost you have in a single day.
For a lot of people going through this exercise, they’ll find that they have a lot of small transactions throughout the day. Maybe you buy a coffee and pastry in the morning for $5. Then you stop at the vending machine mid-morning for another $2. You have lunch out with your co-workers for $10. You might stop for a snack on your way home for another $5. And after a long day at work, you don’t feel like cooking so you eat out for $15.
Each of these purchases alone is small and feels insignificant in the grand scheme of things. But let’s look at the math. Altogether, that’s almost $40 per day. Multiply that by 5 days a week and you’re at $200 per week. Extrapolate that out to a year and you’re spending $10,400!
But we don’t have to stop there. If you instead took that same $10,400 and invested it every year, assuming a 7% annual return, you would have $982,392 after 30 years!
David Bach calls this The Latte Factor. The idea is that your morning latte is costing you a lot more than you realize. And as you can see from the math, it’s true!
Each of the small purchases alone seems insignificant, but when you add them together, you can see how they start to add up. Without measuring those purchases, it’s nearly impossible to see where your lifestyle has become bloated.
I find that the easiest way to track my expenses is to put every purchase on a card. When I say every purchase, I mean every. Single. Purchase.
The reason I do this is because the transaction is then automatically tracked and I can go back and review it later online. I use Mint to aggregate all my transactions. I have a custom spreadsheet where I can export my transactions and review where my spending has gone in the past month.
Just make sure you pay your credit card bill in full.
Forget about the Joneses
One of the other ways you can end up inflating your lifestyle is by comparing yourself to others. Seeing Fred’s new car may make you want to get a new one yourself. But that’s just another way that lifestyle inflation is able to creep into your life.
I wrote an entire article on this subject, but the basic idea is that you shouldn’t be comparing yourself others. Especially since those “others” that you’re comparing yourself to may be living in a financial house of cards.
Thomas J. Stanley and William D. Danko, authors of The Millionaire Next Door, found that those who match the stereotypical image of a millionaire are usually in fact not millionaires. Your acquaintance who lives in a mansion and drives a fancy new car every year is more likely living paycheck to paycheck in order to keep up with the mountain of debt that he has accumulated.
On the other hand, your typical millionaire is more likely to be your nondescript neighbor who has lived in the same house her entire life and drives a 10 year old car. This person has kept her lifestyle costs relatively stable her entire life. By doing this, each time her income went up, instead of spending more she saved more. Doing this allowed her to reach actual millionaire status.
So those who look like millionaires are really just people who have let lifestyle inflation take over their lives. If you want to be a real millionaire, forget about “keeping up with the Joneses” and keep your lifestyle simple.
This one is a little more difficult to implement but I can tell you from experience that it really works. The whole point of advertising is to get us to spend more. If you’re able to get away from ads, you’re less likely to spend more and it’s easier to avoid lifestyle inflation.
Think about this. Advertising is a $190 billion business in the United States alone! Why would companies spend $190 billion? Because it works. There are plenty of people who think advertising doesn’t work on them. But the more savvy individuals understand that even when they’re not consciously thinking about advertisements, those same advertisements are affecting their behavior subconsciously.
I can speak from personal experience. A decade ago, I would regularly watch TV 2–3 hours a day. Considering that each hour of TV usually results in seeing 20 minutes of ads, I was spending almost an hour a day watching ads! At 30 seconds a piece, that’s 120 different pieces of advertisement!
Today, I don’t even have cable or satellite. Besides the direct savings from not paying a TV bill, I’ve noticed that I’m not tempted to buy as much stuff. Without TV, I’m not exposed to nearly as many ads and therefore, I’m not as affected by it.
You see, the first goal of advertising is simply to get you to think about the brand or product. Seeing an ad once may not make you change your behavior, but seeing it 20–30 times is likely to affect you in one way or another. By inundating you with messages about a brand or product, companies are able to get you to think about it more often. If you think about, you’re more likely to purchase it.
A secondary goal is to associate products and brands with general positive feelings and impressions. When you see a commercial that evokes positive feelings along side a product or brand, you subconsciously connect the feelings to the product or brand. By inundating us with these types of messages again and again, just like Pavlov’s dogs, we start to associate certain products with feelings of happiness. We then desire to purchase those products because we subconsciously believe they will bring us happiness.
So how do you avoid ads in a world where the average individual sees 4,000–10,000 ads per day? For one, cut the cable. Not only does cable cost a ridiculous amount of money each month, you’re also paying to watch advertisements which cause you to buy more stuff. Netflix and/or Hulu are much cheaper options.
Second, unsubscribe from those marketing emails. I used to get up to 50 emails a day of just ads until I decided that I would unsubscribe from everything I didn’t want to see it. Now, most days I can get through my inbox without getting a single advertisement.
Finally, just become aware of the advertising that you are exposed to. I like to play a game where each time I see a specific brand in a TV show or movie, I point to it and say “product placement”. Most times, Kelsey just rolls her eyes. But you’d be surprised how often brands try to subconsciously get into our brains. In this case, knowing really is half the battle.
Lifestyle inflation is probably the biggest obstacle most people have to retirement. As I said in my previous article, lifestyle inflation is like running a race where the finish line keeps moving back. Use these tips to finish the race faster.