For the typical middle-class income family, lifestyle inflation is most likely the cause. One could argue that lower-income families just don’t make enough to afford today’s expenses, but that’s not the group I’m targeting.
Target group: Middle class income earners in excess of $51,000.
The middle class demographic is a very diverse group with incomes ranging from just above $25K to just over $76,000. What might be considered “middle-class” in one city or state, might be pushing poverty level in another. To make things a little clearer, I’m going to focus on the median income of $51,000 which is enough in most cities to live “comfortably.”
Yet, here’s where we get into a nebulous area of what’s “comfortable” and in turn see how quickly lifestyle inflation takes hold of our finances.
Let’s start with the basics: rent/mortgage, food, transportation, insurance and utilities.
Rent/mortgage is usually the largest expense followed by transportation and food. Typically, a family shouldn’t spend more than 25 – 30% on their rent or mortgage. In some areas, one might even be able to spend less if they’re willing to live in a smaller space or an area less populated.
Yet the cost of housing can quickly spiral out of control; one minute you’re perfectly happy living in a one-bedroom apartment for under $1,000 and a few years later, you’re spending more than a third of your income on a 2,000 square foot house you barely have time to clean! Then, of course, you have to hire a maid. And purchase all the things that you need to “fill up” that space. The amount you’re willing to fork over for a roof over your head begins to increase and all of a sudden you can’t imagine having to live in a smaller space because you have too much “stuff.”
Oh, and with that larger house, utilities increase. They sort of go “hand in hand” – more space means more space to heat and cool.
As your income increases, it’s not unlikely that you commute farther to work. Instead of a clunker that you were so grateful to have in college, a luxury ride is the only way to travel, especially if you’re stuck on the road for long periods of time. Transportation costs increase and can swallow up to 20% or more of your budget.
Food costs have definitely gone up in recent years, but there are always ways to save money at the grocery store. Check out my tips here.
Hopefully, that job you’re commuting to provides insurance for you and your family, but more often than not, you’ll have to pay some out of pocket costs. You might have little control over your insurance, but staying active and healthy can reduce long term illness and health care costs.
To quote Talking Heads…
And you may find yourself behind the wheel of a large automobile
And you may find yourself in a beautiful house, with a beautiful
wife And you may ask yourself-Well…How did I get here?
The answer: lifestyle inflation
Now, the “extras” or wants: dining out, vacations, all the electronic gadgets that are “must haves”
It’s easy to go from eating out once or twice a week at a fast-food joint to having drinks with your buddies after work a couple nights a week or lunch out with the girls. Pretty soon those restaurant visits drain your wallet. You don’t want to be left out, so you join in knowing you can’t keep up with the spending.
A similar mentality follows with vacations and new gadgets. You don’t want to be the only person on the planet without the latest iPhone or tablet and you can’t say you stayed home on your two-week vacation. You convince yourself that you work hard and “deserve” all these new things and experiences. But really, you’re just digging yourself a bigger and bigger hole. (And so are most of your friends.)
So how can you deflate your lifestyle and begin to save more?
The first step is to think of a time when you were the happiest. This might sound a bit metaphysical, but the point is focusing in on what makes you happy.
Plan A: Downsizing
If you realize you could live with less, downsizing might be the way to deflate your lifestyle.
It’s time for a hard look at the numbers – not the lotto numbers, but your income and expenses figures. Where can you easily chop off some expenses? Cable, perhaps, or switching to a less expensive cell phone carrier (I personally love Ting)?
The more difficult lifestyle deflation will be your housing. If you own a home, you might not be in a position to sell. However, you might be able to rent out a room if the mortgage is eating up a large portion of your income. If you rent, you might have to wait out a lease. Either scenario could mean selling quite a few possessions during down sizing which you can apply towards saving.
Living with less might even mean selling a car, commuting by public transportation or by bike, and getting more in touch with your community. If you can move out of your current home, finding a place closer to work could be a huge benefit and reduce costs on both housing and transportation.
Plan B: I absolutely love all my stuff and can’t let go!
Okay, so you’ve done some soul searching and just can’t let your lifestyle go. Time to minimize the extras.
If you eat out two or more days a week, reduce it to once a week. Visit Starbucks everyday? Set a dollar limit and when it runs out, wait until the following week. Limit new gadget purchases to once every two to three years instead of jumping on a new product right away – wait it out. Plan one terrific vacation every 12 – 18 months, but keep the rest of your getaways close to home or go camping. The “extras” should be the smallest part of your budget.
However, reducing the basics will whip your budget into a better position- shop the sales, have a grocery list or menu plan for the week before you grocery shop, negotiate with your landlord or refinance your home for a lower APR and monthly payment. Chop the cable down to the basics or install an HD antenna and cancel cable altogether, call your insurance carriers and negotiate better rates (or shop around for better rates).
You might find an extra $300 a month to save, which is a start.
Both scenarios focus on downsizing and giving up the extras, but in the end you might find you’re happier with less stuff and more money.
Have you downsized recently or taken drastic measures to reduce your overall expenses? I’d love to hear the details!