Budgeting against Lifestyle Creep: “Same house, same spouse, same car”

Personal finance can certainly get complicated at times — but it doesn’t have to be. Getting started and doing research can be overwhelming, but most of the time, budgeting smartly and keeping your overall financial plan as simple as possible is the way to go.

This holds true not only in your personal financial life, but in your life. Period.

I have an MBA, and generally love taking in as much information on the subject of personal finance as possible. After all, ‘write what you know,’ right? In my readings I came across a great article in Business Insider from Thomas Corley on budgeting and on how to fight Lifestyle Creep.

In the article, he passed along some simple, sage counsel from a mentor of his on the true secret to creating a budget and building wealth:

“Same house, same spouse, same car.”

This statement is excellent on so many levels. Keeping this simple phrase in mind will help you grow your percentage of savings as you begin to (hopefully!!) make more money later in life.

There is a temptation with regards to budgeting when raises and bonuses come in. That is to send the money back out in the form of increased expenditures: Nicer cars, nicer clothes, nicer house, everything. We see our neighbors buying new TVs, so we buy a new one as well. Even though the TV being replaced was working perfectly fine and the new one cost $1,000.

Over time, we begin to neglect what is really important. We have built the type of life that necessitates further income generation just to keep propped up. We let our budget inflate. We haven’t kept our expenses down because we have succumbed to, say it with me now, “Lifestyle Creep.”

Let’s look at a real-ish-world example: 

  • If you had purchased a $250,000 home in a nice neighborhood when you and your spouse were raising one child, you would be making monthly mortgage payments of $1,537.29 at 4% interest.
  • If, at the time, both you and your spouse were earning $60,000 per year respectively, your $120,000 combined income is in the 28% tax bracket.
  • This extremely simplistic breakdown shows us that your housing budget comes in at just over 21% of its total monthly take-home pay.
    • That is a great, relatively low percentage!
    • This leaves quite a bit of wiggle room to load up their 401Ks at work or fund a Roth IRA, and have fun and pay for childcare.
  • If you each enjoy a few raises over the years and bump up your combined take-home pay from $120,000 to $140,000, that is an extra $20,000 each year straight into your pocket, unless you use the money to buy a new car or move into a bigger home.
  • Starting at zero dollars in savings, if you were to invest that extra $20,000 into a simple stock market index fund each year at 6% interest, you would have $749,631,97.

That is a ton of money! All you have to do is continue to live as you already have been. Stay in the house you had been living in before your raises. Try to keep your older car running for a few extra years. Work really hard to ensure you and your spouse remain happy with each one another. Ensure that you two remain happy with the lives you have built together.

Remember this “Real-ish World Example” is “simplistic” in every sense of the word. A bigger house calls for more furniture, exponentially larger heating and electric bills, and higher property taxes. Closing costs and moving costs can run into the thousands of dollars as well. Maybe you have added an extra 20 minutes to your commute? What will that add up to in gas and car maintenance costs?

And this is simply outlining what happens if you move into the bigger house. Divorces can be far more financially devastating that anything else, to say the least. Always keep the lines of communication open with your spouse. Work diligently to stay on the same page. Set up budgeting (and plenty of other) goals, and strive together to achieve them. Enjoy conversations surrounding money. Don’t forget that you love one another deeply, and that you’re in this together.

Your mind, body, soul, and, yes, your wallet will all thank you.

I recommend Personal Capital for your budgeting needs!

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Check out the ongoing, full retirement ladder here:

Step 0: Create a budget that helps you get wealthy

Step 1: Why building an emergency fund is so important for your nest egg

Step 1.5: What type of account is best for your emergency fund?

Step 2: Contribute to your 401(k) up to the company match

Step 2.5: How should I pick the best 401(k) investments for me?

 

3 Comments

  1. As you continue to earn more money, keeping your expenses the same or attempting to lower them is the best way to manage your personal finances. Path to financial freedom!

    July 7, 2017
    Reply
    • NestEggNinja said:

      Nailed it! Especially as you first start earning those bigger paychecks. The lifestyle you are accustomed to is still low enough, whereas attempting to trim excess spending once you’ve already gotten a little older and committed to larger expenses can just be so daunting.

      July 7, 2017
      Reply

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