We’ve all heard the phrase “Keeping up with the Joneses”. It even has its own Wikipedia page with competing origin stories. Perhaps the greatest marketing trick ever is making people equate social status with material goods.
Instead of worrying about the neighbors who (supposedly) make more money than us, what if we instead looked carefully at the neighbors who make less than us? Their valuable example is what can actually help us grow real wealth. What am I talking about? Michael Taylor of Bankers Anonymous explains in his post Saving is never easy:
But – and here’s a key point that you should understand – if you make $50,000 per year, you probably live on the same street as someone who makes quite a bit less than you, say, $40,000 a year.
Somehow your neighbor making $40,000 has figured out how to pay all the bills and sock away an extra few hundred dollars every month. I don’t know she does it. Frankly, I’m resentful of her success. But I’m also impressed.
Also, she doesn’t understand how the family of four two blocks away can survive on $30,000. And yet, that family does it too.
Meanwhile, in another part of your same town, another family is going completely broke on $120,000 a year. If they could just find an extra 10% more income, they think, the checkbook would balance. They could pay down that ever-growing credit card balance. But each month comes and goes, and the debts grow.
Let’s consider this in the context of financial freedom and early retirement. If you wanted to oversimplify things, you would say that you need to control your spending to the household median income level (say, $50,000 a year) while boosting your household income to double that (say, $100,000 a year). A nice, round 50% savings rate. I’m sure many households who make over $100,000 would laugh at the idea of spending under $50,000 a year. Impossible. Can’t do it. But guess what? Half of all US households are doing exactly that every day, so it certainly isn’t impossible! For some reason of human psychology, it is just incredibly hard to make that choice.
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Good article (yet again) on something I call lifestyle inflation.
It’s partly cultural. People feel entitled to live a higher standard of living on a higher paycheck.
And I don’t completely disagree with that since more money should lead to a better standard of living.
However, one shouldn’t go completely nuts & nullify the effects of a rising paycheck.
In 2009 I graduated college & got a job making 35k a year. My expenses were 1000 a month.
In 2010 switched to one paying 45k a year. My expenses were still about 1000 a month.
In 2011 got a job for 70k a year. My expenses rose to around 1200 a month.
In 2012 got a raise to 72k a year. My expenses remained 1200 a month.
In 2013 got a raise to 75k a year. My expenses increased to 1300-1400 a month.
In 2014 switched to a job paying 85k. Expenses increased to 1500-1600 a month.
In 2015 got a raise to 95k. Expenses are around 1700-1800 now.
In 6 years since graduating college, my salary has increased like 300% while my expenses have only gotten up by 70% or so. I have improved my standard of living while not getting trapped in lifestyle inflation
In your example, your salary did not increase “like 300%”. The actual increase was 171% (i.e. (95-35)/35).
I think G is right, 95/35= 2.71 = 271% approx. 300%. Just eyeballing it you can see it went up around 3 times.
That’s not how percent increase works. By your logic, going from 35 to 40 is a 114% increase. That’s wrong.
Percent increase is (new – old)/old, as Anony Mous calculated.
Yes I think we all are mixing 2 things here.
e.g. if i went from 30k to 90k, my salary rose 3 times
although the % increase differential would only be 200% (90-30/30k).
You guys are right, apologies.
Lets just say I currently make 300% of my previous salary in 2009.
this should settle all confusion.
I made that approximation because in my head,
I was also counting bonuses that I make now & which I didn’t make when I was making 35k.
(although you can argue bonuses don’t count as salary)
PS: Also, your math is off.
When you measure salary bump in relation to a previous one, its (new salary) * 100 /(old salary).
That measures how much it went up. The way you are measuring measures the % of differential increase (not the increase itself)
You’re just flat out wrong.
The percent increase in salary is (new – old)/old. Period.
The quantity x = new*100/old would just mean the new quantity is x% of the old one. This is NOT a percent increase.
I don’t know why you keep talking about a % of differential increase. There’s no such thing. There is a percent increase in salary. There is also the new salary as a percentage of the old one. But not a “% of differential increase.”
If you want to define “% of differential increase” then please define it clearly because that is not a term used by people who understand math.
This issue has already been settled. Refer above discussion for clarification of the verbiage.
My salary is 300% of what it was in 2009 but the “increase” is obviously going to be less.
we were talking about different sides of the same statistical coin.
People seem to be focused on the percentage salary increase… I rather ask about the elephant in the room. Please explain your expenses. Unless you live with 3 roommates and ride a bike/train to work, I just don’t see it. Someone that just left college 6 years ago would, most likely, still be paying school loans. If so, it should all get included. You can’t just pick and choose which expenses you want to include. Otherwise, your attempt to measure “lifestyle inflation” isn’t helping anyone quantify this tendency of overspending.
“Unless you live with 3 roommates and ride a bike/train to work, I just don’t see it.”
LOL, you don’t see it because you probably live in a overpriced city like new york.
In good old south florida, I live alone in a 1 bed/1.5 bath apartment near the beach and pay 800 in rent.
I don’t have student loans anymore since I did internships and worked 2 part-time jobs while in college & yet graduated with a 3.5 GPA. It ain’t easy but it’s doable if you think smart.
Not at all. In fact, my city’s cost of living is less than in south florida. $800 gets you a 2 bed / 2 bath rental, although nothing near a beach.
I don’t doubt that your expenses are low, just that they are as low as you say. I initially thought my expenses were extremely low until I started tracking everything. I later realized that things were getting left out of the calculation. For example: atm transactions to get cash out, health insurance deduction from paycheck, things paid with checks from checking account, and also how do you factor in those semi-annual bills like car insurance?… just to name a few.
Unless you spend time each month monitoring your transactions your estimates have to be off. In 2009 you could not have been paying 800 in rent, since that would only leave you with 200 for food and utilities. If your expenses this year are 21600, 9600 of which is rent, then that would mean that you stand to save almost 70% of your income… even after i remove 20k from taxes. Again, call me incredulous, I don’t think your numbers are accurate.
I see why you are confused. You are comparing apples to apples of another year. My rent now is 800 a month. I didn’t say my rent in 2009 was 800 a month. Since I was sharing with a roommate at that point my rent was far lower at about 400. This is what I call as sensible lifestyle inflation. As soon as I could afford a place of my own, I moved out.
My current expenses are pretty simple since I paid off my car recently : 800 rent + 100 car insurance + 170 comcast + 200 groceries + 30-70 electricity depending on season + 300 miscellaneous expenses like going out with friends on weekends to bars/restaurants etc. I am close to 200k in networth due to fiscal discipline which I don’t think is bad for a guy in late 20s
Nope. Confusion is rampant but not on my end.
“My current expenses are pretty simple since I paid off my car recently : 800 rent + 100 car insurance + 170 comcast + 200 groceries + 30-70 electricity depending on season + 300 miscellaneous expenses like going out with friends on weekends to bars/restaurants etc.”
i guess 300 miscellaneous also includes everything like fuel, furniture, clothing, and everything else that is missing? do yourself a favor and take a closer look.
supposed income:35+45+70+72+75+85+95=477k
supposed expenses:12+12+14.4+14.4+16.8+19.2+21.6=110.4k
close to 200k? arithmetic says you should be much higher, and taxes alone does not explain the discrepancy. like i said before, your numbers don’t add up.
i’m glad you seem to be frugal enough to save a fair amount… congratulations are in order not many under 30 have almost 200k saved and not just tied up in equity. my advice is to keep doing what your doing. however, when you explain it to people please do the math, or have someone help you out with this part, because your math explanations make people think the whole story is nonsense.
People who can’t believe that are ones who don’t understand the principle of progressive taxation or the fact that there are miscellaneous expenses (like when I moved to Florida from the northeast or down payment on a car and many many other one time expenses with aren’t your “monthly” expenses.
My work is not to explain all the variables of math to simpletons but to provide a rough guide to lifestyle inflation and how you can sensibly go about it
Wow. I started out thinking I should help you, when so many others simply mocked you, for not knowing how to measure percentage increases. “we were talking about different sides of the same statistical coin”. You crack me up! You were wrong then and you are still wrong. Monthly expenses are NOT what matters with lifestyle inflation, a term that you did NOT come up with, by the way. People buy fancy cars, houses, and purchase services that others would not… and that is what makes up the bulk of lifestyle inflation. Groceries, utilities, and cable bill doesn’t say squat about this tendency. Showing recurring monthly bills only, and leaving out the loans and vehicle purchases is outright naive and pretty useless as an indicator of lifestyle inflation. The devil is in the details, as they say…
You are not the only person that understands progressive taxation, nor does your salary make you unique in any way. I know first hand that taxes don’t come close to explain the gap.
At any rate… I’ve wasted too much time already conversing with someone that only sees one right answer, and that is always their own answer. I’m done making that mistake.
looks like someone is feeling a little holier-than-thou.
I never said my salary makes me unique so there is no need of putting words in other people’s mouth. My examples deal with monthly expenses that are common to others and not special one-time expenses like helping out grandmother with 20k. Those don’t count as lifestyle inflation for me although they will make a dent in the net worth.
we aren’t talking about personal net worth just the increase in everyday expenses as your salary increases. You can choose to haggle about dimes and nickels or take the broad message. There is no remedy for small mindedness and trying to find faults for the sake of finding faults.
last but not the least,
I could care less what anyone else thinks..
I am the one building my net worth rapidly & others can feel jealous for all I care.
@G agreed on the cultural point. As an immigrant to this country from 13 years ago at the age of 21 my lifestyle inflation is far outstripped by the income gain. On some items (e.g., drinking at bars:) ) our expenses are actually far lower than 13 years ago. It helped that I did not get my first real job (outside of graduate school) until 2008 so avoided getting sucked into the housing boom.
I can’t find the study right now, but studies have shown that when people are asked “Can you save 5% of your income?”, of the people who say no, a majority of them later in the survey say yes to “Can you live on 95% of your income?”
I have been saving 30 – 40% of my income for about 10 years now. Getting older and having a family made it harder to maintain the savings each year. However, I can’t imagine a single year where I can’t save at least 20% of my income. Assuming no financial disasters come up (e.g. a week in the hospital, vehicle accident, house fire). In my opinion, it’s just irresponsible to not save for a rainy day.
I need to factor in guilt spending, which is spending lots of money on toys for kids when I’m working. When I was off from work, I never did this. If you are a couple with one stay at home parent, probably you stick closer to the budget, I imagine. I would venture to say that those that make much less are in a one income situation. You become frugal and watch for coupons and say no more. I did that when I was home — can’t say I miss that, but I do miss being home all the time.
I imagine some people being frugal out of necessity, but I’m frugal for other reasons. I grew up poor, so it was ingrained from an early age. I know the value of money, and what it truly represents… freedom to make choices in life. I mean real choices, not the lesser of 2 or 3 crappy choices.
I do agree that family changes how frugal you are. Being frugal is hard, if you don’t have the time, spending money is usually easier… but of course, always with limits.
Some people are also frugal by personality. I remember that even as a child, I’d tell my parents not to buy certain things because it was “too expensive”. It’s not that I didn’t want toys (I did). But I tend to want very specific things and then nothing else beyond that. It wasn’t until I grew up that I realized that there is a hedonistic treadmill that most people are on and some people just want to buy a lot of things. When I splurge, I definitely splurge guilt-free (typically food-related purchases) but I’m glad that overall, there just aren’t that many “things” that I want to own. As for growing up poor, some people will learn from the experience and spend wisely. Other people overcompensate for their childhood by making flashy status-item purchases in adulthood.
Instead of living large, think how little can you live on, and save the rest. If you save $1000 a month for 30 years, at 6% returns, you will have $1 million. Everyone should have $1 million after working for 30 years or more. But you need to control your behavior.
The one part that fails when figuring 100k should = 50k in savings… your taxes are different. If you can live on 50k with a family, awesome. But 100k in salary does not translate to 50k saved because you’re actually ending up with less cash than the family making 50k if you attempt this.
In CA with nothing going to 401k at 50k you end up with 41k to live on. In CA with nothing going to 401k at 100k and 50k saved, you’d end up with 25.6k to live on. The family making 50k would seem ludicrously wealthy.
If you put 18k in 401k and take out 32k for saving savings you’d still be left with only 33.6k to live on.
So no when you go from 50k to 100k that doesn’t mean you can now save 50k without radically changing your standard of living.