Advice to my Younger Self: Keep Lifestyle Inflation Under Wraps

From a money perspective, people are often categorized as “savers” or “spenders.” I’m one of the former. At least part of this I can trace back to my childhood; when I would earn money mowing lawns or lifeguarding, the household rule was that half of that money would go to my savings. I think the same held true for Christmas and birthday money, too. I never really knew what “savings” were for in this context, especially when I was little, but at least the habit of putting money there was imprinted upon me.*

Fast forward to my life as a brand new college graduate and first-year professional. This is such a pivotal point in a young person’s financial life. I had learned, in part from a little book I received upon graduation, about the power of compounding interest. My parents tried to impart upon me the idea of investing when I was still in high school. However, like so many other things in this life I was late to the party in truly comprehending this valuable lesson.

In any event, I had also learned in this little book the contrasts between renting vs owning my own home. I had decided that renting was not high on my list of priorities. As a result, I set out with a plan to save as much money as possible so that I could buy my own place. Of course, this was much to the chagrin of my then-girlfriend (not my now-wife!) who was maybe more of a “spender.” A fairly-typical conversation from that timeframe distilled to:

Her: “Hey, super handsome boyfriend who’s out of my league, let’s go meet some of my low-life friends at a bar! After all, it’s a Tuesday!”

Me: “I’d much rather just buy some beers at the store and hang out somewhere we can hear each other and not have to pay 500% markup for the pleasure. We could probably buy beer for all of your low-life friends at the store for cheaper than the cost of paying for ourselves at the bar. I want to save my money to buy a house, after all. Want to do that?”

Her: “Nope. I’m going to meet my low-life friends at the bar. You need to spend more of that money you’re making!”

Me: “Cool. You’re great.”**

Well, post-her, I did save enough money to buy my own residence, as luck would have it. While many of my other friends were going out to bars constantly and spending gobs of money, I hung out with friends who didn’t value too-loud music and not really even talking to strangers. And I saved money. I still had tons of fun during this stage of my life and met lots of new people.

Which brings me to the point of this musing… While lots of my friends were out going to bars all the time because that was what was expected of us at this stage of our lives, I laid low and saved money. I didn’t rent an apartment in a hip part of town. Because we were all new to earning money, many people wanted to spend it. I wanted to save it. There wasn’t a whole ton to start with, since I was earning about $35,000 per year in the DC-area, but it worked for me.

“I’ve Earned It!”

This attitude can be extrapolated out to apply to many stages of life. Remember my discussion of coworkers and their luxury cars? If you are a little more purposeful and informed of how you spend your money, you can avoid some of the traps of spending more than you should, which will continue to snowball and become enduring costs. Think about the car example because it’s a great one to illustrate this point. When you first start working a real job or get a promotion, you might feel like this:

“I make more money than I’ve ever made before! With all this money I now make, I can afford a much nicer car than I currently have, and I’ve earned it!”

DON’T DO IT! Along with the higher price tag of that nicer car comes a greater cost of maintenance, more depreciation, maybe worse gas mileage, and… wait for it… a desire to “level up” many other aspects of your lifestyle. And the problem here is that you’ve locked these higher expenses in for the life of your new car.

You Have a $1 Million Decision to Make…

Try out this nice little tool Edmunds offers, called True Cost to Own. For sake of argument, let’s compare a 2021 Toyota Corolla with a 2021 Mercedes CLA 250. Everyone knows that the Mercedes is bound to cost far more than the Corolla, so let’s put a pin in that $16,685 difference.*** 

What I’m also interested in is the rest of the data Edmunds provides, which they sum up in a graphic so it’s easy for us to compare our two vehicles:

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What you’ll notice in the figures above are that the total cost of ownership over five years for the Mercedes is over $24,000 more than for a Corolla! If I may be so bold, too, Edmunds overlooks (perhaps for simplicity’s sake) the taxes incurred on an annual basis for personal property tax (which your city or county may levy). For some of the cities in my area, these taxes are graduated, meaning they are higher on a percentage basis the more valuable your car. For the $43,500 sticker price of the Mercedes, you would be hit with a personal property tax bill in the neighborhood of $2,000 per year. The Corolla would net you a tax bill of about $1,100 per year. 

Added to the figures Edmunds provided us, we’re looking at total cost of ownership for five years of about $64,000. For the Corolla? $36,000. So depending upon the locality you live in, you might be out $28,000 more over five years to keep up your Mercedes than your Corolla. All told, after 5 years of ownership, the Mercedes will have cost you an additional $44,685 when you take into account the purchase price of the vehicles.

And what would a post be if it stated some financial savings and didn’t provide accumulated savings over the long-term? For this simple example, if you invested the difference between the Corolla and Mercedes each year and earned 7% interest, you would amass $123,477 in ten years. Over the course of 20 years, that’d be $366,376. If you can avoid this kind of lifestyle inflation for your entire working career (which we’ll call 35 years), you will have saved an additional $1.235 million. 

One more time for those that might be late to the party on comprehending this valuable lesson: You can amass more than $1.235 million over your career by choosing to drive a Toyota Corolla over a Mercedes Benz and investing the difference. Would you rather drive a Mercedes Benz that comes with ventilated front seats, or a Toyota Corolla that comes with a briefcase filled with over a million dollars on the front seat? This is the choice you are making.

Bad Car Decisions Aren’t Your Only Way to Lose a Fortune!

This is just one potential facet, albeit a very consequential one, of lifestyle inflation. The same can be said for any, let’s call it, “I’ve earned it” decision: 

• Going out to eat at more and/or fancier restaurants
• Buying a bigger, fancier house (there are a myriad of factors that come into play here, however, so this is not always a truism)
• “Upgrading” the diamond or other shiny gem on your engagement ring (people do this!?)
• Hiring out tasks you can learn to do yourself
• Buying an extra car
• Buying a fancy vacation house for non-investment recreation purposes
• Taking ever-fancier vacations

Over time, these decisions can steal a lot of your hard-earned money, as we demonstrated with cars. That, folks, is why you should do your darnedest to avoid lifestyle inflation.

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*Thanks, Mom and Dad!

**This is what I’m calling “hindsight sarcasm.”

***The problem is, that’s where most people stop their analysis.