Lifestyle Design: Fighting Inflation

Inflation has to be one of the worst things you can hear as a personal finance connoisseur. It means the constant degrading of your purchasing power. Everything you’ve worked so hard to save and put away is losing value with each passing year, and there are a number of steps you take to prevent it from draining away to nothing (seeking higher rates of return, in particular). But there’s another kind of inflation that threatens to have a similar effect on your finances: lifestyle inflation.

Lifestyle inflation, put simply, is when you constantly increase your spending to meet a rising income. Let’s say, for example, you’re pulling in a respectable $35,000 a year. On $35k you can get by pretty well with a modest apartment and vehicle. Then you get a promotion and you’re at $45k per year. At this point you have two options:

• Live exactly as you do now and bank the difference, investing it with a proper allocation strategy so that you can one day buy things like a house or a car in full, without debt. OR
• Get a new, larger car with not-so-great mileage and a 2 bedroom apartment despite the fact that you have no idea what you’ll do with the extra bed room.

The pull for more stuff is strong, even with seasoned veterans of lifestyle design like myself. I often come to the middle of a crossroads when I hit a windfall. On one side there are things I’d like…the new Dawn of War game, an Ipod, etc. On the other I see my remaining debt…happily collecting interest each month and sucking away a portion of my check with each passing day. This imagery is usually enough to convince me that I want to pay off any debt I have as soon as possible. This strategy has led to our car being paid off in full by August, and my student loan removed in the following year. At that point I will be, for all intents and purposes, debt free. No mortgage, no car, no loans, no interest…nothing.

It will be glorious.