November 10, 2010, 5:00 am

Lifestyle Inflation Infection

by: The Financial Blogger    Category: Assets and Net Worth,Personal Finance
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“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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[…] The Financial Blogger: Lifestyle Inflation Infection […]

I almost suffered from it, but I caught myself before it happened. Because I knew I was getting a raise, I made sure to adjust my budget in percentages, and set aside money for additional savings. Before, I was getting by paying bills and having left over cash. I’m now using that extra money to boost my savings. But, it happens to the best of us

I worry about lifestyle inflation (not infection) as we begin the process of buildin our new house. It will end up costing more than I wanted, but we can afford it and I think we deserve a bit of luxury…at least in our own home, we might as well get the nice counter tops, flooring and cabinets now then to pull them all out and renovate them later.

I use a forecasting spreadsheet with all projected income and expenses for the entire year, this helps me keep on track when I know the insurance or property taxes are due, or when I have maxed out on CPP and EI contributions through payroll deductions and will see more money in my pocket each month.

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The trick to combating lifestyle inflation is to Pay Yourself First.

Before you spend a dime on anything, including bills, take at least 10% of your income and invest it. Then, you don’t have to worry about what you are buying, because you are getting ahead each month. And, as your income goes up, so will your monthly investment.

You will definitely find ways spend all of your income, no matter how much you make. So, you have to put some away right off the top. Otherwise, you are working every day just to give away all of your income to others and you will never get ahead.

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Currently, I’m battling with lifestyle inflation.

I think the motivation for me lately has been European or Hawaiian vacation next year. That has enabled me to regain my focus on the numbers.

So I think if you create a savings goal and have every penny count, it’s easier to control lifestyle inflation.