Lifestyle Inflation Is About More Than You

by David Ning · 34 comments

Once you trade up, you are never going back.

Lifestyle inflation is a real phenomenon that I’ve surprisingly seldom talked about. Basically, it refers to the strikingly true fact that most people increase their spending as their income increases no matter how much or how little they earn.

Stepping up the standard of living ladder is fun but it absolutely sucks for people who have to scale back. Now that we are expecting our first child, we should not only think about the danger of own inflation bubble but also of our children’s. My parents always reminded me that they were very happy making their own games with paper. In fact, they said that it was one of the happiest times of their lives. But in this day and age of Nintendo Wiis and Sony Playstations, kids would look at you like you are crazy if you even suggested those paper games. It’s not that the games of old are no good. It’s just that they are used to much more complication toys.

In fact, Inflation Starts the Second You Are Born

My mom called me the other day and told me that she bought some baby underclothes for her grandchild, but when she saw softer, more expensive versions, she bought the nicer ones and returned the ones she already purchased. When I heard it, my immediate thought was “what if the baby gets used to the really nice undershirt and cry when we give her standard ones? Are we going to expose our children to the higher standard right from the beginning?”

Other, Bigger, More Important Aspects of Our Standard of Living

Fortunately, baby clothes is a relatively minor issue. What’s more important is the bigger ticket items, like…

  • The House – Living in Southern California, we live literally a few miles from the ultra rich. Emma and I agreed that we shouldn’t live in a place where our house would fall in the same school district as those multi-million dollar homes because we rather have our kids grow up not being exposed to some of the reckless parents who shower their kids with money.
  • Cars – Last night, Emma suggested that we shouldn’t ever buy our kids a high priced vehicle as a teenager in a luxury car zipped by us. How is the child ever going to live below their means if you start them off with a Porsche on their 16th birthday?

I used to think that lifestyle inflation is perfectly fine if you have confidence that you can forever keep it up. However, the statement is flawed. Inflation is only okay if you can ensure that you, your children and every decedent of yours can cope with a possible deflation.

Even if you don’t want to curb your own lifestyle inflation, at least do it for your children.

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{ 34 comments… read them below or add one }

Miranda September 29, 2009 at 5:46 am

You make some great points. Giving our kids everything only conditions them to expect it. And what happens when they can’t maintain? Or (gasp) learn that they may have to work for it? We’ve been trying to teach our son to be grateful for what he has, to work to earn what he wants and live within his means. Hopefully we’re setting a good example…

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Financial Samurai September 29, 2009 at 7:09 am

Lifestyle inflation in indeed VERY real and very scary. We went from living in a 1 bedroom condo, to now living in a house about 4X the size. Amazingly, we’ve filled the entire house up already with furniture and junk we don’t need.

Beware of lifestyle inflation. We’ve cut it off here for sure and may downsize. We’ll definitely downsize in 10 years if we retire early.

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Craig September 29, 2009 at 7:34 am

It’s easier to go up in lifestyle but harder to go down. That is why I’m so happy with my new car purchase, because I’m at a different point in my life and it is an upgrade from the first car I ever owned. You have to be careful though, just because an increase in salary comes, doesn’t mean you should go spend crazy. If anything you should go save crazy.

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Financial Samurai September 29, 2009 at 11:15 am

Craig, just curious, but did you follow the 1/10th rule we have regarding spending no more than 1/10th your yearly gross income on your car? If not, what % did you spend?

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Jane September 29, 2009 at 11:23 am

And a picture of the car would be good too. :-)

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MoneyNing September 29, 2009 at 12:35 pm

I’ve never heard of the 1/10th of your yearly salary on cars, but I’m sure many people know about it. If you account for gas, insurance, maintenance, etc, it’s actually quite tough to meet unless you are driving a clunker.

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Financial Samurai September 29, 2009 at 1:35 pm

Hi David – Not sure if many people know about it, b/c not many people know about Financial Samurai yet :) Maybe in the future, it’ll be a financial norm among the PF community, but clearly not yet from the many examples that I’ve seen.

The rule is simple the purchase price of the car equals NO MORE than 1/10th your gross annual income. The other stuff are fixed costs that happen regardless, so we just exclude them and hope for the best. By using the 1/10th rule, we develop a buffer for extra costs anyway.

If you think about it, a typical millionaire earning doesn’t typically drive a $100,000/car. They may drive a $50-80,000 car, but $100k+, very rare. So why is it that someone who only makes $100,000/yr would be spending a full 1/2 their gross salary on a $50,000 car? It makes no sense, given a $50,000 car = $70,000+ in gross income needed to be earned. Worse yet is someone who makes $50,000 and spends $25,000 (avg. price for a car). That is jus a disaster, b/c you’re getting squeezed with your remaining funds.

What makes people finance a depreciating asset that costs 50% of their gross salary is pretty perplexing. I think cars are the #1 personal finance killer for many guys out there.

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marci September 29, 2009 at 8:13 am

Disagree with the once you trade up you are never going back philosophy. I have owned a 2700 sq ft home on 1.5 acres, 2800 sq ft on 55 acres, and a 3000 sq foot home on 8 acres. Now I live in a 1035 sq ft home on a 55/105 lot…. You’d never get me back in anything larger than 1200 sq ft and a double lot…. mostly due to maintenance and upkeep.

Had fancy computer toys and never used them… once I tried them once, they weren’t worth the time invested in using them. Can’t see spending my money on them.

Had a fancy TV system once and a big TV – now don’t even have TV and don’t miss it at all….

Sometimes you have to try out the fancier stuff to appreciate the more basic stuff – and see that that is where you are truly happy.

Yes… you CAN go back.

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MoneyNing September 29, 2009 at 9:51 am

I think we should hook you up into those monitors and try to figure out why (more importantly, how) you can totally separate yourself from the usual hoopla or wasteful spending :)

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marci September 29, 2009 at 2:43 pm

I still pick up pennies from the sidewalk…. figure that one out :)

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Financial Samurai September 29, 2009 at 1:37 pm

I agree Marci. One can go back. I went from a $80,000 car to a sub $8,000 car five years later, and I love it. This is despite the fact my income is more than it was then.

Going back actually makes things very fun.

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marci September 29, 2009 at 8:15 am

PS – Now that I finally have a camping travel trailer tho – NO, I am NOT going back to a tent :) The older I get, the more I enjoy comfort. :)

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MoneyNing September 29, 2009 at 9:52 am

Oh nevermind my last comment. You are still one of us.

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marci September 29, 2009 at 2:41 pm

Maybe :)
I waited on the trailer til I found a beautiful immaculate one only 10 yrs old for $2000. It was quite the steal – or I’d still be tenting it. :)

I consider it an investment in my grandchildren’s childhood and future…. hoping to pass along to them the frugal fun I had as a kid camping, so they can pass it along to their families later…. and give them tips on frugalness. From a comfortable standpoint.

We use the tent as an extra space for when the whole family gets together.

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MoneyNing September 29, 2009 at 3:30 pm

It doesn’t matter if it’s a deal or not. Buying is buying :)

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marci September 29, 2009 at 3:41 pm

But…. there’s different types of buying….
Buying frugally with forethought and planning and waiting for the right situation (deal). OR
Buying impulsively and figuring out later how to get out of the hole you dug yourself into.

:)
Just playing devil’s advocate here.

Wes Y September 29, 2009 at 8:45 am

I’m 23, and I didn’t have a car until I was almost 22. The thought of my parents buying me one was borderline ridiculous. Once I did get my own, I paid for it, including insurance, gas, and all other expenses. Unless you have an old clunker that you’re keeping around for the kids, I would recommend against providing a vehicle for your kids – DEFINITELY while they’re still in high school. Once they hit college, it’s a more difficult subject, but they should at least cover insurance, gas, and routine maintenance.

Providing anything for free encourages lifestyle inflation – we become used to something that we either wouldn’t buy ourselves or might not even be able to afford otherwise.

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Jane September 29, 2009 at 10:27 am

Wow. Thanks for the food for thought. I’m still chewing on it… :-) And that’s a great term ‘lifestyle inflation’. I’d never thought of it like that before.

More power to you Marci. I still miss the facials that my sister and I used to get years ago. Though the difference is probably if we have a lifestyle deflation by choice or necessity, then that affects how we feel about it.

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Jason @ MyMoneyMinute September 29, 2009 at 1:12 pm

Great point — it is nearly impossible to go backwards on the standard of living without being forced to because of financial ruin.

One point though — not all “rich kids” are spoiled brats. In fact, being in a school district with “rich kids” may provide your own children with the positive pressure of succeeding in school, etc. Often in average and below-average school districts, educational success it met with disdain, not encouragement. But knowing SoCal like I do, there are lots of spoiled rich kids that spread entitlement attitudes like a cancer :o)

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MoneyNing September 29, 2009 at 3:37 pm

Speaking of education and good influence for our kids, I think the sweet spot is actually the upper middle class because most of those parents got to where they are because of their education, hard work and logic.

What I find is the super rich actually don’t put as much emphasis in education. Either it’s because they are too busy with their own business and neglect their children, they made money without higher education themselves or the kids have so much money there isn’t much motivation.

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marci September 29, 2009 at 2:35 pm

I don’t think that 10% for a car deal makes sense if you are debtfree… I think the % should be tied to your non-debt money. There is a lot of difference between a person who makes $50,000 and spends that much in debt each year and a person who makes $50,000 and has NO debt.

I also think it has a lot to do with how long you expect to keep the car.
I figured if I paid $20,000 for my Forester, and it lasted 10 years or 200,000 miles, then the cost of the car itself( not maint/repairs/ins/gas) was $2000/year. And that seemed reasonable to me – what I was willing to pay, in any case – about 10% of my pay for the year went each year for the car. Now as it turns out, I’m at 10 years for the car, and only 115,000 miles, so I will have it for a lot lot lot more years to come, bringing the cost per year down even lower.

If I followed your 10% rule, I would never have owned more than a $2000 car – and that just was not going to happen – mostly for safety and dependablity reasons for me. Some of us live VERY very well on under $20,000/yr – so I can’t see your rule of thumb applying to those in the lower income brackets.

My rule of thumb was to never pay more for a car than my take home pay for the year. One year’s pay, after taxes, was my guideline for what a car should cost me. Has worked well for years. But then I’ve been debt free for a long time also.

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Financial Samurai September 29, 2009 at 3:52 pm

Hi Marci – Thnx for your thoughts. It’s the reason why the rich get richer, and the rest of us stay the way we are. The rich spend far less than 10% of their income on a car as they are focused on making a lot more money. I do not believe it is bad to try and make more money if you want to. Conversely, if you’re happy with what you have, that’s all that matters.

You have a great point regarding duration of car, and how much debt you have or not. To amortize your car over a 10 year period makes a lot more sense financially. I just don’t think most people keep their cars for that long, so again, the 1/10th rule helps buffer ourselves from this fact.

Safety is also a key issue. However there are definitely safe second hand cars out there for $5,000 (i.e. 2001 Honda Civics etc) for those making the average GDP/Capital of $50,000.

My 1/10th rule is really just a guide line, and to each their own. I used this rule when I was young to keep me grounded, and to continually strive to improve both sides of the equation (make more, reduce spending). I remember telling myself when I was 24 years old when I coveted this $35,000 year old bmw car, that I would use the 1/10th rule to motivate me to make 10X that. The goal was actually achieved several years later. I’m happily driving my old SUV which cost less than 1.6% of last year’s compensation, so that’s why in my perspective, going 10% is actually a very reasonable limit.

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marci September 29, 2009 at 7:58 pm

Dear Financial Samurai – I AM one of the rich :) LOL. If you look at a financial statement and not at the yearly income. That’s the funny thing about it all… I’m in the top 5%….. which is sooooo funny. I ust work now cuz I’m too cheap to pay for health insurance :) You can be rich on $20,000 year…. it’ s all about NOT spending – and about putting your money, and the bank’s money, to work for you….. Once your money starts making money, having to generate a lot of money in actual working income is no longer necessary.

I bought my Forester at age 45. The way the miles are going on it, I figure it will be the last car I will ever need to buy :) Same with the Silverado I bought this year – used…. It will be the last pickup I ever need to buy….. That’s quality and duration and buying once and not having to do it again :)

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Financial Samurai September 30, 2009 at 11:11 am

Sounds good Marci. You are lucky to be in the top 5%. What determines the top 5% anyway?

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marci September 30, 2009 at 11:27 am

some posting on a blog on the internet a couple months ago – from the NY times…. I found it funny actually that they placed more emphasis on annual income (where I am in the bottom 20% area and always have been) than on net worth (where I am in the top 5%) Doesn’t take a lot to be in the top – debt free helps tho.

marci September 30, 2009 at 12:04 pm

Luck really has NOTHING to do with it :)

CD Rates Blog September 29, 2009 at 2:56 pm

The 10% rule seems hard to follow, but I can certainly see how it would make sense and even help you be debt free.

Lifestyle inflation is real and scary. We eat out a lot for many factors. And I do worry about what my kids expectations or behavior will be. We can afford it, but will they?

Thanks for the providing some food for thought.

cd :O)

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David@DINKS Finance September 29, 2009 at 9:46 pm

My friend in high school got a lexus, BRAND NEW from her dad. He ruined her perception of what kind of car is right for her. She probably won’t realistically be able to “afford” a car like that for well over a decade (of course this totally depends on a variety of factors). Now look at my first car, a beat up saturn whose AC didn’t work. Plus I shared it w/my sister. I’ll tell you what – we both value just having our own car now. Plus my $5,000 used car and my sister’s $9,000 used car (both bought in full with cash) seems like a HUGE upgrade.

Now we just have to avoid stepping up too fast with our next cars – I will probably look for something in the $8k – $10k range, used of course.

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Financial Samurai September 29, 2009 at 10:58 pm

$80-100,000 in salary first David. :)

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Lee September 29, 2009 at 11:21 pm

Lifestyle Inflation is fun to combat, in some respects. I’ve cut my life back to the bare necessary bones and will keep that going hopefully forever. The end result is much more money in the bank account .

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Chris September 30, 2009 at 7:52 am

I think it always does children well if they are not really aware of how wealthy you are. When the kids are older and developed a correct sense of proportion then you can relax a little more. We have a friend whose father is a very comfortable dentist and she was totally unaware when growing up that he had access to a large amount of money.

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Debt Cures September 30, 2009 at 8:02 am

You should buy yourself a Porsche on their 16th birthday. – LOL
Actually, I had many friends growing up whose parents gave them cars and money. Some of them did fine, but the majority had skewed expectations, and many weren’t prepared to work at a level required to achieve those expectations.

I fear that these days it is even worse. Many younger people that we hire expect the farm from the outset, and are somewhat taken aback when they discover they’ll have to pay their dues and prove their worth first.

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Stephen @ Financial Services September 30, 2009 at 2:23 pm

Porche at 16th? Why not. lol

Seriously, I think the important thing here is that they’ll realize how much their things worth and how daddy bought it. It’s like giving them PF education. If they know the basics of PF, there’s a good chance that they’ll value what was given to them and live within their means.

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Bankruptcy Ben June 7, 2010 at 7:51 pm

My parents moved into a rental in the school catchment zone of the rich in my first year of primary school. I got a great education and a sense of disdain for the children of the wealthy. Don’t worry about sending you kids there you’ll get the 2 things you want: a good education AND teaching them that the attitudes of the rich little spoilt brats are terrible.

BS thanks Samuri for the 1/10th rule. I like it.

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