“Hi, my name is Mike, and I am suffering from a Lifestyle infection. But before I start with my lifestyle problem, here’s how I realized that I have a problem”
I was having a beer with 3 of my friends the other day. This ritual goes way back, it started while in University (this was 7 years ago!). We all went to the same school but we now work in different industries. The thing we have in common is that we all make over 100K annually and, to be honest, I am the one with the lowest income ;-). However, I am the one with the most expensive lifestyle…
Rumor has it that someone who makes 30k per year will spend his salary. This is not hard to believe; once you have paid the rent and for transportation, you don’t have much left over with this kind of income. The rumor also says that someone who makes 100K will find a way to spend it all (and even overspend!). Well in the case of my friends, I can tell you that it’s the opposite! They got used to living off lower incomes and save most of their bonuses and leftover income. They use this extra money to:
- build a down payment for a house
- build an emergency fund
- pay off their debt
What is lifestyle inflation?
Lifestyle inflation is when you start making more money and instead of using it effectively as mentioned above, you start increasing your lifestyle. A bigger house, a new car, furniture payments, a TV amortized over 60 months, more activities for the kids, etc.
All these new expenses become a burden as you now need to make more money to support your new lifestyle. This is why it is called inflation. I call it a lifestyle infection when it becomes too difficult to support.
This is when the train hit me; I am infected!
Lifestyle inflation is probably the worst sickness in North America. It’s hard to see the first symptoms, it grows fast and when you realize that your lifestyle inflation has become an infection, it is almost too late to recover from it.
After I moved into my new house this summer, I knew that I had spent a little bit too much of my bonuses and extra income coming from my online company. I was getting out of a tough period when I switched jobs, got my CFP certification, finished my MBA and had a 2nd child. Let just say that I had the urge to enjoy life and, for the first time, I started to borrow not only to build assets but just to enjoy myself.
Getting infected by lifestyle inflation
Now that I have my new house, my new car (and my sports car on top of it), I know need to slow down. I just realized that I seriously need to do get well as during the past 4 weeks, I have suffered many expenses over a short period of time:
-$1,500 for a washing machine and dryer (totally unexpected)
-$5,000 in municipal and moving taxes (they told me it would be payable in January 2011!)
-$300 in car maintenance (better be ready for winter)
-$1,000 in notary fees to write my will (in case winter or my other bills kill me)
As I have mentioned before, when you realize that lifestyle inflation is getting to you, it’s almost too late…. The train of my lifestyle just punched me in the face this month.
Recovering from a lifestyle infection
Over the past 2 years, my income has been increasing dramatically. My 2007 tax return showed an income of about 65K and my 2010 will be about 120k. The problem is that I have increased my lifestyle according to my new income. Fortunately for me, I will take control of my expenses before the infection takes over completely. Starting in 2011, for the very first time since I started working, I’ll be concentrating on paying off my debts. This means that:
- I will use my extra income from my online company to increase my line of credit payments
- I will use my entire bonus (payable on Jan 2011) to pay off my credit cards and make my RRSP contribution (I wanted to go on vacation but this won’t happen)
- I will use my next raise to increase my debt payments
- I will delay all my projects (garage, vacation, spa, central A/C) until I can pay them cash.
House That’s Too Big
Many people often fall into the trap of buying the biggest house they can possibly afford. This sets them up to encounter problems if the budget gets tight. Not only will home repair be an issue, especially for large older homes, but the cost of furnishings and the need to update appliances could be disastrous in hard times. Having the prestige of a large glamorous house could be tempting us into decades of poverty.
Lenders won’t tell you, but they tend to approve mortgage loans based on what you could theoretically afford, not what you should really be spending. Just because you are approved for a home loan does not mean you can truly afford to buy the home. If there is any dip in income or a flood of unforeseen expenses, making the huge mortgage payment on time when your funds are already stretched thin becomes much more difficult and you run the risk of losing your home.
Do You Suffer from Lifestyle Inflation?
Have you been infected yet? How do you manage your extra income? What is your trick?
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