Lifestyle inflation robs you of your money

You’re a Hazard To Your Money

“I know I need to save more… it’s just that I never have any money left over at the end of the month!” I hear this often. Most people don’t earn enough to save money. Some people are barely scraping by. Life is expensive.

The truth is though, we adjust our spending subconsciously all the time. What if you received a 5% pay cut tomorrow? Or, if you’re self employed, what if you happen to have a slower month? Does the world stop spinning? No, you simply adjust. Maybe you eat out less each month. You cut back on your shopping. You skip the daily latte. Your flexibility helps you make it through.

Let’s move in the other direction, however. What if you received an unexpected raise? Do you continuously account for merit increases? Inflation adjustments? Do you update your budget to show you can now afford to upgrade to a large popcorn at the movie theater every month? Of course not. For small fluctuations in income, we tend to just naturally adjust, almost subconsciously. Over time, these small course corrections add up, and before you know it, lifestyle inflation has robbed you of your ability to save money!

Lifestyle inflation doesn’t necessarily mean buying a boat or a mansion. It is usually quite incremental and sneaks up on you over time. Maybe you just start eating at restaurants a few extra times each week. Or you start buying slightly higher priced clothing. Maybe when the Civic stops running, you let the car salesman talk you into the more spacious Accord. Or you move to a slightly nicer house, in a slightly more expensive neighborhood.

Lifestyle inflation robs you of your money!
Lifestyle inflation robs you of your money!

While your lifestyle (and subsequently your expenses) increase over time, your happiness does not. Seriously. This is known as hedonic adaptation, and it’s robbing you of your money! It’s subtle though- you may not notice the hedonic treadmill while you’re walking on it, but you will when you’re still working in your 70s.

You’re a Hazard To Your Money

My mom taught me a trick when I was in high school that always stuck in my mind. As she would pay bills and balance her checkbook, she would always keep $100 hidden from the balance. It was in the account, but her hand ledger never showed it. “I pretend it isn’t there. I never see it, but it protects me from overdrafts if something goes wrong” she said. She was hiding money from herself. I was intrigued.

What if we take this idea to the next logical step? What if we acknowledge that lifestyle inflation can happen to the best of us, and protect our money from our own human nature? Here’s an idea: set your 401(k) contribution at work as high as you possibly can. My employer lets me contribute 50% of my paycheck. I never see the money come into my checking account, so it’s hidden from myself. No way to inflate my lifestyle with money I don’t see!

Set It And Forget It

No 401(k) available to you? The same trick works with direct deposit. You can ask your employer to direct deposit 50% of your money into a separate savings account, preferably at a separate bank from your checking, so you never see the money. And when you can’t see the money, you can’t spend it. Instead, those dollars stay in your accounts, working for you.

Even better idea- did you know you can configure Vanguard to accept direct deposit? It’s easy, and it works for both taxable and tax sheltered accounts! Throw your money into VTSAX, or choose an all-in-one fund like the LifeStrategy fund I described in last week's investing post. Set it to 50%, forget it, live your life, then automatically join the FI party in a decade!

Start Now

Tricks like these work best if you apply them on your first day of work, at your first job, right out of school. Why? Because you’ve never had a regular paycheck before, so you aren’t ‘used to’ having more money around. There’s no headroom to ever allow lifestyle inflation to creep in. In my 20’s, one of my college professors told my wife and I to “live like college students as long as you can!” I didn’t understand what he was talking about at the time, but looking back, I’m fairly certain it was this. If I had taken his advice, I’d have been FI years ago.

Of course, if you are later in your career, there’s still time to change things. You can drastically cut your spending each month and increase your savings rate, and getting rid of the money from your checking account is a great way to put the pressure on. Go big- try 50% or more. Think that’s impossible? Re-read how we increased our savings rate to over 80%. Remember: you can always transfer some money back to your checking from your hidden accounts if you go too aggressive, so start now! Just keep that extra hundred handy in your checking as you adjust to your slim new cash flow so you don’t overdraft.

Want to take this idea even further? Get into the good habit of giving your hidden accounts additional bumps each year. Whenever you receive a merit increase, inflation adjustment, or bonus, never let your checking account see! Instead, add that percentage to one of your hidden accounts right away. Your cash flow never changes, and the money is never missed.

Summary

Sometimes, it makes sense to take extra steps to protect ourselves from our own destructive tendencies, or trick ourselves into meeting our goals. Trying to lose weight? Never let donuts or other unhealthy sweets into your house. Want to become more social? Get a job that forces you to interact with people on a daily basis. Spending too much time in front of the TV? Hide it in the attic, or sell it on Craigslist. Want to stop snoozing? Put the alarm clock out of arm's reach on the other side of the room.

Want to save money? Hide it from yourself! Don’t look at it. Leave it alone and let it grow. In a decade, you’ll be very glad you did.

Published by

Joel

Blogging about our dramatic financial turnaround as we approach Financial Independence!

9 thoughts on “You’re a Hazard To Your Money”

  1. Unfortunately, Vanguard’s Direct Deposit service is not as good as it used to be.

    If you opened your Vanguard account more than a couple years ago, they used to separate mutual fund accounts from brokerage accounts (where you can buy ETFs, stocks, etc). They’ve been “upgrading” people to their combined mutual fund/brokerage accounts. If you haven’t been forced to upgrade, the DD works as before (I don’t know if they’ve forced it on everybody yet)

    However, if you have been upgraded, or otherwise opened your Vanguard account after they started merging accounts, then your DD can only be directed to the money market fund for your account. Now you can get around this by then setting up automatic exchanges of buying VTSAX or what have you from your money market fund the day after payday (I guess you could do it the day of, but the money might not be there yet), but it’s just an annoying extra step they make you take.

    That aside, I completely agree that hiding money from yourself is a great strategy for most people. The only downside I see is that for some people, this may result in them saving less than they could.
    I used to have a budget. And at the beginning, the budget was great because it pulled back my spending. But after a couple months, it became detrimental in that if I saw I had $X left for category Y left at the end of the month, I’d spend $X even though I didn’t really need or want what I bought.
    But in the end, are they still better off than not setting up automatic investments? Probably.

    1. Even with the extra step you are describing at Vanguard, it is still just a one time setup. Even if it takes an hour to get it configured right, you then can safely ignore it for the next decade while your money works for you in the background. Hopefully, this is just growing pains while accounts are upgraded and it will get even easier in the future!

      As for hiding money vs. budgeting, I think one can compliment the other. Simply create a budget for the reduced amount that shows up in your checking. Every few months, tweak the amount hidden as appropriate to keep things as aggressive as you like. The main thing is to ensure you are saving enough money to meet your own early retirement goals, and hiding money is a great way to accomplish this while simultaneously fighting lifestyle inflation.

      1. Don’t get me wrong – I don’t think hiding money is a bad idea. It makes for a great starting point. I just don’t think it’s the end all be all.

        1. Agreed. This is ideal for people who are more hands off. This is a ‘set it and forget it’ method. Set it, forget it, work hard for a decade or so, then enjoy FI. I have a few friends and family members who this would be perfect for. If you are more hands on, you may want to just use it as a starting point, as you mentioned.

    1. Most people do this! For a few years I was guilty of the same. One day I wondered “I have a high paying job. Why can’t I save any money?!” It amazes me how all the little increases add up over time.

  2. If you are earning a pretty good salary then putting 50% of your pay into your 401k is going to push you past the legal maximum annual contribution of $18,000 in just a few months at which point most employers will stop deducting contributions from your checks. Just something to keep in mind.

    1. True. Each employer retirement plan is different. Many automatically switch from pre-tax contributions to post-tax contributions after hitting the pre-tax limit. Total contribution limits for 2017, including post-tax and employee match, is $54,000.00. You may be able to do a Mega Backdoor Roth conversion with the post-tax dollars: see http://www.madfientist.com/after-tax-contributions/

      For those who can’t make post-tax contributions, one option would be to simply switch from 401(k) contributions to automatic direct deposit into Vanguard brokerage or similar. There’s lots of options- the main point is to keep the cash away from your checking! 🙂

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