The Danger of Keeping Up with the Joneses

Lifestyle creep can compromise a financial plan

How often do you think about inflation? While it has not been a hot topic in the US over the past decade, most individuals know that inflation refers to the general upward price movement of goods and services over time. Our first lessons on inflation typically come from the University of our Grandparent’s Lap in the course Back in My Day 101. For the latest lessons, you will find mutual fund companies and investment managers showing how much milk you could buy in 1928 compared to spending the same amount today. One of the core reasons why we invest is to protect our savings from losing its purchasing power to inflation over time, so we can maintain our standard of living without having to work additional jobs in retirement. Like most macroeconomic concepts, we have no control over this force and the faster we are comfortable with this, the better off we will be. Although, there may be one specific type of inflation which is much more personal to each of us, and one where we might have some control.

Hulu’s latest marketing campaign is centered around the premise of “Better Ruins Everything”. The commercials feature celebrities and athletes cautioning viewers how first class flights, walk-in closets, king size beds and even putting bacon on your burgers make it impossible to ever go back to the old way. They then spin this into how subscribing to Hulu will ruin how you watch television and use a bit of reverse psychology to warn you not to buy their product; weird flex, but okay. I commend Hulu for putting a spotlight on a common personal finance pitfall, referred to as Lifestyle Inflation. The main principle is that once you decide to upgrade a part of your life, it becomes the new standard and thus raises your spending floor until the inevitable upgrade in the future.

Lifestyle inflation (or lifestyle creep) is a huge threat for individuals in the early and mid-career accumulation stage of their financial lives. It spawned the phrase ‘Keeping Up With The Joneses’. Maybe it’s not first class flights, but instead it is membership into the local country club. Or maybe it’s not expanding to a walk-in closet, but it’s the decision to get a second vehicle. I will say no bad things about bacon because everything is better with bacon.

How does lifestyle inflation begin?

Let’s take a ride down Memory Lane. Can we remember our very first paycheck? How about our first raise or bonus? What did we do with that money? Now, a great response would be “invested it into a diversified portfolio” or “purchased shares of Berkshire Hathaway stock”, but the likely answer is “bought some stuff”. The follow up question would be – how much of this stuff do we still have today? I would assume very little to none. Lifestyle inflation first pops up the moment we purchase an item or service ‘just because we can afford to’. These days, in our on-demand and subscription based economy (the subscription e-commerce market has been growing by more than 100 percent a year¹), spending money has never been easier.

How far could it go?

If you have ever felt like the outflows in your cash flow were moving at a faster pace than expected, you are not alone. Many Americans lack the available savings and would need to turn to a credit card for an unexpected emergency². This is not just a problem among lower income individuals. If you work in a big enough company, I can all but guarantee that there is at least one person in your dream job, earning what you consider your dream salary, and yet, still lives paycheck to paycheck. There was a viral piece a few years ago that showed how this could happen³.

What are some ways to avoid this creep?

Nevertheless, this is not a post to preach about why you should think twice before you enjoy your Starbucks or pushing you to cancel your gym membership and go workout in the park. A truly satisfying part of career and life advancement is being able to enjoy the spoils of our labor. The last thing you want to do is go cold turkey and completely deprive yourself. The most important thing to do is identify if lifestyle inflation has become a problem – and if so, here are a few strategies to fight back;

• Follow a budget
  • Note the carefully selected wording. There is a difference between creating a budget and following a budget that works for you. One can create a budget the same way one can create a well-rounded nutritious diet plan. It’s only once we start picking up the celery that the strategy is in motion.
• If you can’t see it, you can’t spend it
  • A major propeller of lifestyle inflation is tying up what should be excess cash into unnecessary expenses. One great way to protect yourself is to redirect your income. Sending a percent of your paycheck to your retirement account or directly to your investments is a great way to avoid having excess cash commingled into day-to-day spending. Already trying this and still having trouble? Commit to the microresolution of a 1% savings increase every three to six months and see where you stand in a year.
• Speak to yourself
  • This is the self-reflective part of our journey, so let’s jump back into the DeLorean time machine and accelerate to 88 miles per hour. It’s easy to lose track of just how far we have come since we first started working. What if you could put yourself in a room with your younger self? What messages would you deliver? Would anyone tell themselves to save or invest less? Now think about the future. What can we do today that our future self will be thankful for?
• Have a financial plan
  • It is never too late to ask for help. If you have attempted the steps above and still feel overwhelmed, do not give up. Writing down your goals and constructing a financial plan is a great way to see where you stand today in relation to them. An underrated benefit of a plan is that it can show the brilliant power of compound interest and just how far a dollar saved and invested today will go in the future.

Footnotes:

1. https://www.mckinsey.com/industries/high-tech/our-insights/thinking-inside-the-subscription-box-new-research-on-ecommerce-consumers#0
2. https://www.bankrate.com/banking/savings/financial-security-0118/
3. https://www.businessinsider.com/its-surprisingly-easy-to-end-up-living-paycheck-to-paycheck-when-you-earn-500000-a-year-2017-3