I had to issue that warning to myself yesterday. I love looking at big, old homes and imagining what it would be like to live there.
Spring has sprung here in Philadelphia, and I’ve been exploring the neighborhoods. Recently – in my mind – I moved into a coach house big enough for three families and a mansion built in 1752, nearly 130 years before Durango was on the map. With each move, of course, came the inflated lifestyle to match.
Lifestyle inflation, or lifestyle creep, is the tendency to spend more as we earn more. We can also inflate our lifestyle after we pay off debts and then spend that money unconsciously.
Increased spending is not always a bad thing. It’s perfectly natural to want a more comfortable lifestyle as your income increases. But left unchecked, lifestyle inflation can trade our future for today’s desires.
I suggest checking for lifestyle creep every year, right after you finish your taxes. Review your finances in these five areas:
Your budget: Do you have and follow a budget that includes accumulating money for less-than-monthly expenses? If your answer is “no,” create one.Bank and credit card statements: Look for luxuries, indulgences, overspending and recurring charges. This is an opportunity to eliminate waste. When I reviewed my statements, I found a gym membership that had continued to bill us after cancellation.Housing costs: Calculate the percentage of your take-home pay that you spend on housing. If it’s more than 35 percent, your lifestyle today may harm your future. Also, review how much it costs to maintain your home. Some of the old homes I’ve looked at come with a budget-busting number of renovation projects.Debt: If you have consumer debt, such as credit cards, car payments or a personal loan, it’s a symptom of living beyond your income. Total your balances and divide that number by 12 or 18 months. That’s the amount you’ll need to pay off each month to be debt-free next year.Emergency fund: If you are debt-free, congratulations! Now, do you have an emergency fund equal to three to six months of living expenses? If not, it’s time to build one by redirecting lifestyle spending into your savings account.
Your budget: Do you have and follow a budget that includes accumulating money for less-than-monthly expenses? If your answer is “no,” create one.Bank and credit card statements: Look for luxuries, indulgences, overspending and recurring charges. This is an opportunity to eliminate waste. When I reviewed my statements, I found a gym membership that had continued to bill us after cancellation.Housing costs: Calculate the percentage of your take-home pay that you spend on housing. If it’s more than 35 percent, your lifestyle today may harm your future. Also, review how much it costs to maintain your home. Some of the old homes I’ve looked at come with a budget-busting number of renovation projects.Debt: If you have consumer debt, such as credit cards, car payments or a personal loan, it’s a symptom of living beyond your income. Total your balances and divide that number by 12 or 18 months. That’s the amount you’ll need to pay off each month to be debt-free next year.Emergency fund: If you are debt-free, congratulations! Now, do you have an emergency fund equal to three to six months of living expenses? If not, it’s time to build one by redirecting lifestyle spending into your savings account.Being debt-free, having an emergency fund and saving at least 15 percent of your income is a clear indication that your lifestyle is congruent with your earning power.
If your personal audit revealed areas where you need to make changes to reach these goals, take action right now. Like pulling off a Band-Aid, quick is best.
Durango resident and personal finance coach Matt Kelly owns Momentum: Personal Finance. www.personalfinancecoaching.com.
