Let me begin this blog post with a story about a friend of mine. For privacy’s sake, let’s call him M. Savard. No, wait, that would be too revealing. Let’s go with Mark S.
Mark recently got a promotion at work. Before taxes, he’s making about $10,000 more than before. Mark was thrilled. Not only did his boss recognize all his hard work, but this raise was going to be the impetus he and his sweetie needed to finally lick those pesky credit card debts. They diligently funneled most of Mark’s raise towards paying debt for the first couple of months, soon enough they’d have the debt kicked to the curb. But then, stuff started to happen.
Mark and his wife decided they were going to get a dog. And then a second dog. They love animals, see, and they can afford to take care of them now. Total costs for both exceed $100.
Mark’s new position is a little more stressful than his last. So a week’s holiday to Las Vegas was needed to blow off some steam.
The couple also decided to buy some new furniture, since they finally had the cash. Their dog promptly peed on their new couch a mere two hours after it came home.
What I described above is a classic tale of lifestyle inflation. Somebody gets a raise and immediately starts spending their brains out. It’s happened a million times before and it’ll happen a million times again.
But wait, you say, I already know about this. I’ve read about lifestyle inflation before and I already guard against it. Whenever I get a raise I always increase my savings rate so I’m saving a percentage of the new raise too. I’m a smart personal finance type person, I would like a gold star please.
Well, sorry, you’re not getting one. Why? Because all that strategy does is control lifestyle inflation.
If you get a $10,000 raise at work and you only have $1000 extra in savings from it, I’d argue that’s a personal finance fail. Sure, you saved $1000, but it’s nothing compared to what you could have saved. Celebrating a minimal achievement will only ensure the future is filled with minimal achievements. Mediocre results should not be greeted with champagne and pats on the back.
Most people have a spending problem. They spend money on Starbucks and dinners out with their friends and One Direction CDs. These things are relatively minor, but they have a way of adding up over time. They also commit larger financial sins like buying too much house and driving new cars. Forget for a second that there are often legitimate reasons behind these extra expenditures, the fact remains that spending extra money is taking you away from your financial goals.
In North America, we have lives of incredible comfort. In the span of 70 years we’ve gone from legitimately worrying about how we’re going to feed our families to eating for sport. We’ve gone from having to send a letter across the Atlantic to firing up our laptops and actually having a face to face conversation. And we’ve gone from relieving ourselves in a giant hole to having futuristic Japanese toilets clean our nether regions for us. I so want one. What a time to be alive.
I’m not saying you should do without the comforts of today’s world, I’m just saying maybe it’s time to be a little more selective. Do you really need Netflix and Xbox and an iPad? Do you think you could maybe make due with only one? Maybe you could hang onto your 42′ TV a little longer before you upgrade to the 50′ one. Don’t worry, Black Friday will still be around next year.
If you’re consciously aware of your spending at all times, it makes it easier to supercharge your savings rate. If you cut relentlessly on things that aren’t important and spend intelligently on things that are, you can get to the point where you can start saving 100% of your raises. That’s the point where you start seeing real results.
Again, nobody is saying you shouldn’t be pushing hard to make as much money as you can. The secret is to not spend it. If you put it away and let it grow then you’ll be on your way to financial freedom. Isn’t that the whole point of all this?