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Avoid Lifestyle Inflation: Create an Artificial Sense of Scarcity

Written by Nickel - 23 Comments

Lifestyle inflation is a huge threat to your financial well-being. Unless you’re exceptionally well-disciplined, it’s very difficult to keep your spending from increasing in lockstep with your earnings.

The primary reason for this is that gradual increases in your income/spending are, more often than not, barely perceptible from one year to the next. If you step back and look at the big picture, however, you’ll see that you’ve been working for years and never really getting ahead.

What can we do about it?

One of my favorite tricks for beating lifestyle inflation is to create what I call an artificial sense of scarcity. By this, I mean that you should go out of your way to “hide” your money from yourself.

Start by moving your long-term savings out of your “everyday” bank. Out of sight, out of mind. If you don’t see the money sitting there every time check your accounts, you won’t be constantly reminded of its presence, and you won’t be tempted to spend it.

Beyond this, whenever you get a raise, make a point of increasing the percentage of your salary that goes into your retirement accounts. Also consider setting up (or increasing) an automatic transfer that draws off a portion of your income for long-term goals.

Note that I’m not saying that you should never enjoy the fruits of your labor. We all like nice things, and might reasonably want to elevate our lifestyle over time. I’m simply suggesting that such changes should be the result of a conscious decision.

Also note that this doesn’t have to be an either/or proposition… At my first “real” job, I started out stashing 5% of my salary in my retirement account. From that point forward, I increased my contribution percentage by half of each raise that I received.

For example, when I got a 4% raise at the of my first year, I contacted HR and increased my retirement contribution to 7%. Splitting my raises like this allowed us to enjoy a bit more take home pay while jacking up our savings. Best of all, it was totally painless — you won’t miss what you’ve never had.

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Published on August 14th, 2009 - 23 Comments
Filed under: Frugality, Saving & Investing

About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

23 Responses to “Avoid Lifestyle Inflation: Create an Artificial Sense of Scarcity”

1
pharmboy Says:
August 14th, 2009 at 9:22 am
My wife and I accomplish this same concept by living on a budget substantially less than our take-home pay. On paper we force ourselves to live off $3750/mo and the rest of our salaries goes directly to ING.

We feel broke, which is a good thing because it’s making us rich.
2
Dylan Says:
August 14th, 2009 at 9:36 am
I’m actually writing a newsletter article about this right now. The twist I suggest is to deposit all of your pay directly into your savings account and establish a recurring transfer into your “everyday” checking account for living expenses. Most people do it the other way around, but anytime you get a raise or bonus, the onus is on you to increase the money going into your savings account so you don’t spend it.

By manually controlling your own payroll into your checking, when you get a raise or bonus, you have to deliberately give your checking account an appropriate raise in order to be able to spend it. Now instead of automatic lifestyle inflation with manual savings inflation, you have automatic savings inflation with manual lifestyle inflation.
3
RB @ RichBy30RetireBy40 Says:
August 14th, 2009 at 9:59 am
Nickel and fellow readers, I agree! I wrote extensively about this topic in my article “Going Broke To Win Big”. Essentially, I have 3 banks, one for operations, second for debt, third max savings. I’ve employed this “Going Broke” method for 8 years, and it has done wonders for me.

I also wrote about a “Going Broke To Win Big – HELOC” edition. I think homeowners with HELOCs will find this very insightful.

I really only need about 80K or so to survive comfortably, and when I started making multiples of that, I SPENT LIKE CRAZY so I needed to fix myself.

Good luck everybody! Right now, I’ve got ZERO in my checking account b/c it just got flushed out to my savings. I feel great going broke in my day to day bank

Best,

RB
4
craig Says:
August 14th, 2009 at 10:04 am
Nice plan. I don’t think there is anything wrong with a slight upgrade if you can afford it, but no reason to go crazy. Better off saving more money for the long run.
5
Rosa Says:
August 14th, 2009 at 10:09 am
The other thing about keeping the same budget as your income rises is that it stops you from maxing out the features on things you buy.

For instance: over the last 11 years I’ve traded up from a car with no functional sound system at all, to a car with a radio, to one with a cassette deck, to our most recent car having a CD player.

That means each new car was a big step up in driving happiness (not to mention in reliability). If I’d gone into debt when I was 24 for a nicer car, I would have never been able to trade up. I would have always been paying off the loan and then getting another, similar car. If I managed to pay off the loan before the thing died.

So the reward isn’t just in the distant future when you have a lot of money; sticking with your budget means you get rewards – even if your budget stays the same, the technology/availability curve is running ahead of you.
6
Penny Says:
August 14th, 2009 at 11:02 am
Hi there,

Does this approach still apply when staples (food/gas/heat/housing) and all types of insurance have increased at rates beyond regular inflation?
What about when you add a person to your family? Can you reasonably expect that half your meager raise can go to retirement and the other half to savings? What about when you take a pay cut or get no raise for a few years? Does your contribution come down, or do you cease all forms of “frivolous” spending at the expense of the quality of your life?

Just sayin….
7
Kevin@OutOfYourRut Says:
August 14th, 2009 at 11:03 am
This is rich! All you have to do to inflate your lifestyle is do nothing and go with the flow, and in short order you’ll be spending more than you earn, even if that’s rising too.

I like the idea of ‘hiding’ money from yourself, but it’s a point well taken. If you aren’t purposeful about keeping your spending under control, debt will be the eventual outcome. And once you get used to that…you’re cooked!
8
My Journey Says:
August 14th, 2009 at 11:34 am
FCN,

This is exactly what I do! I love it. The moment my main checking account starts looking a little fat I start SPENDING. I have auto transfers to ING every week to make sure to keep it low.

GREAT POST
9
Gene at www.kitchentablenomics.com Says:
August 14th, 2009 at 11:44 am
I’ve found something like this pretty workable, both personally and in many of the financial plan profiles I’ve written about in my previous career. It’s basically an envelope system like our parents might have used.

Just a quick note to Penny from a couple posts back – Good point. I think you can adjust this plan to the realities you talk about. What’s worked for us is giving ourselves mental 10 or 15 pct pay cuts back when income was steadier and stashing that money for special savings or minor emergencies. Heck, we’ve even saved money from unemployment checks before those ran out.
10
Penny Says:
August 14th, 2009 at 12:40 pm
Thanks, Gene.

My current frugal challenge is not saving or paying off debt, but how to enjoy life and not become a miser. ALSO to avoid having to borrow money (an unbearable thought)!

Nickel: please write more on this, geared to young frugal folks just starting out! If you need more details; I am a newlywed, twenty something, home owner, no credit card or car debt, first baby on the way….
11
Rosa Says:
August 14th, 2009 at 1:03 pm
Penny – I have kept our spending stable over the last 2 years as prices for utilities and food have gone up quite a bit.

That’s how I got started on the frugality blogs – looking for tips to keep that spending the same in the face of inflation. For instance, we eat about 1/2 as much cheese and 2x as much beans as before, and I’ve cut out prepackaged food almost entirely, so even though food inflation has been high our food spending is actually down (I carved out an extra $50/mo for the food bank, while I was controlling our budget.)

Adding an extra person is a different issue – but controlling the extra costs is the same sort of problem. And of course living below your means ahead of time is a great way to have the skills and the budget cushion to absorb the new person.
12
Penny Says:
August 14th, 2009 at 1:47 pm
Rosa,

I completely agree with what you’re saying. I definitely appreciate finding new ways to control spending on necessaties—those tips and tricks help add to our bottom line. And in my case, it’s generally easier to save money you already got paid with than it is to earn more.

But after training your brain to enjoy being frugal, and assuming most debts are paid off—what does a frugal person do next? Go ahead and try to earn more? Enjoy life “more” via spending? Learn how to invest in something-or-another? Or keep saving for fear that one will never have saved enough for the unforseen emergency just around the corner?
13
Rosa Says:
August 14th, 2009 at 2:54 pm
Well, we’re kind of in that position now – it’s not really a problem for me, I just cut my work hours back til I’m at equilibrium and do whatever I want with the extra time (right now, mostly taking the kid to the beach and decluttering. And arguing on the internet when I should be working so my day ends up taking 7 hours when it should be 6.)

For my partner, who loves his job and is not going to cut back…we’re giving more to charity, investing (and spending the time learning about investments), and talking (and talking and talking and talking) about what exactly we *are* going to do with the money. The thing we really don’t want to do is raise our fixed expenses, because we want to be free to revisit any of these decisions.

It’s an interesting balance for us because he is security-minded (having to cut his 401k contribution from 20% to 10% when I was a SAHM really made him anxious) and I am totally not. But working out what the hell we think we’re doing has been really good for our relationship.
14
Penny Says:
August 14th, 2009 at 3:22 pm
That’s really neat that y’all work together on this stuff. I am pretty much in charge, and I am positive that if I were unable to pay the bills and etc every month, that my hubby would wreck our credit in short order. It’s just not his bag (though I force household finance “state of the union”’s on him anyways from time to time).

Wish I could go to PT when we have our baby—my boss says “no way, Jose”. Perhaps figuring out how to work less (and continue to thrive on less) should be my goal du jour?
15
Manshu Says:
August 14th, 2009 at 4:01 pm
I have been practicing this myself for years now and it works pretty well. The place where I hide money changes with time but the principle remains the same.
16
Rosa Says:
August 14th, 2009 at 4:55 pm
Figuring out how to work less is hard. I was lucky to have a part-time job on commission for a long time, but it was newspaper advertising and if there’s a worse industry to be in right now that’s not in Detroit, I don’t know what it is.

So after my 2 years at home, I ended up working full time for almost 2 years before I found a decent part time job – but it’s only decent, not good. If I could go back in time and say to my younger self “Major in accounting, there aren’t many professional jobs out there with part-time or seasonal options”, I totally would.
17
JC Says:
August 14th, 2009 at 5:01 pm
This is a great idea, and one that my wife and I have been doing for a while. We send 15% of my income to 401k and another 10% to an Employee Stock (ESPP) program.

On a month-to-month basis things feel tight and it forces us to spend wisely. But twice a year when ESPP comes due we have a nice lump sum sent our way. Since we’ve lived on the lesser amount in the mean time, the ESPP can go to savings.

We also move that savings to another bank altogether so we don’t see the balance when we login to our “daily” checking account. In the back of our minds we know its there, but we try to live like its not.
18
Kevin@OutOfYourRut Says:
August 14th, 2009 at 5:07 pm
Forget about savings and retirement, we need to keep lifestyle inflation in check so we have more money to keep up with Regular Inflation.
19
Nickel Says:
August 14th, 2009 at 5:53 pm
Rosa: It still applies if you can make it work. If you can’t, then you adjust. Obviously, you can only create an “artificial” sense of scarcity if you don’t already have a real sense of scarcity.
20
QM Says:
August 16th, 2009 at 2:58 pm
Great post. I think college students are a great target audience for this topic. They (typically) can really stretch a dollar. If you could continue living that college lifestyle after graduating, the savings would really grow and your stash could start compounding while you are young.
21
Neil Says:
August 17th, 2009 at 2:14 pm
This would be a better idea if I ever get a raise. Stupid slow economy.
22
Wayward Says:
August 17th, 2009 at 2:36 pm
This is an excellent article, and somewhat timely.

Scoob has received one 2% raise in the past 9 years and was forced to take a 5% paycut this year, and I’ve been 2 years without a raise and need to take unpaid days off this year.

If we hadn’t been creating scarcity, as you say, the past several years, we would be in a world of hurt now.
23
CLM Says:
August 21st, 2009 at 5:51 am
One can beat the Inflation by proper planning and savings. This is a tough task to be performed since maximum amount is been utilized within the family and some is spent on unexpected situations.

But if both couple work, then one can have total saving and the other total spending.

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