Lifestyle inflation happens when our income rises, we increase our spending.
Like a balloon that gets larger, we tend to spend our expanding pocketful of extra dollars.
It happens when we get our first job after college, get raises, bonuses, or change jobs for more pay. We conjure up what we had considered buying before this newly found financial freedom and spend it quickly. Instead, we should be using this money wisely.
To avoid lifestyle inflation, we need to understand our budget when we start our first job and throughout our career.
Briefly, there are 9 ways to use our savings, which we discuss below after we put a budget in place:
- An emergency fund.
- Set up a budget.
- Spending limits.
- Pay down debt.
- Pay down student loan repayment.
- Retirement savings.
- Leveraging the power of compound interest.
- Diversify your investments.
College Students Are Probably Better Budgeters
When we go to college, we become frugal out of necessity.
College needs for money for the academic year are housing, meal plans, public transportation or car costs including insurance, gas, repairs, parking permit, textbooks/supplies; cellphone/cable/streaming; clothing, food outside of meal plan, entertainment, clubs/ activities; clothing, computer, travel, laundry, and personal items.
Parents may share or pick up school-related costs such as housing, meal plans, car insurance, clothing, textbooks, travel, and computer. Students may also have their mobile phone and streaming through shared family accounts. Parents may provide their kids a monthly allowance or an emergency fund for miscellaneous expenses.
Students are most likely going to pay for lifestyle needs like meals and alcohol off campus, gas or public transportation; additional clothes, entertainment, gifts, personal items, and any club they belong to.
Working Through College Helps
The average full time college student makes $195 per week and may stay on for winter break or during the summer. Many college students may work 30 hours per week or more at a variety of jobs on and off campus.
The majority of college students make between $7,500 to $42,000 per year while in school according to Bizfluent. The wide gap is likely due to hourly differences for full-time students and for part-time students who may work at full time jobs.
According to a 2016 Digest of Education Statistics article, 43% of full time students were employed and 78% of part time college students were employed.
A 2016 LendEdu survey illustrates college students attitude about money, jobs, budgeting and saving:
Current financial situation:
- 49% of students were in fine shape versus 51% barely making ends meet.
- 42% were saving money monthly, 58% were not.
- 71% were saving some part of their income while 29% were saving zero.
- 73% of college students worked during studies: 16% had an on-campus job, 24% had part time off campus or internship, 28% had a summer job and 5% had full time employment
- 59% were very knowledgeable or moderately knowledgeable about budgeting.
- 57% were budgeting either using an app or doing it by hand.
- 43% were not tracking their monthly spending.
- 19% had an emergency fund while 81% did not.
- Their biggest monthly expense, the largest categories were: food (38%), rent (29%), alcohol/drugs (25%) and clothing (8%).
Knowledgeable about Personal Finance
- 51% were very knowledgeable or moderately knowledgeable about the need for saving for retirement.
- 34% took a personal finance course in college, 21% hadn’t but planned to and the rest have no interest in taking such a class.
Personal Finance Goals: 29% want to pay off student debt, 19% start saving for retirement, 23% plan to build good credit and 20% want to save for vacation and/or a special vacation.
This survey indicates a need to learn how to better manage money at a young age in order to have more financial security and freedom long term.
First Job Post College Leads to Lifestyle Inflation
A college student with less funds is more budget-oriented. They may have accumulated some cash while in school or parental contribution but they use it sparingly.
Once getting their first job, a $50,000 plus annual income feels pretty sturdy in former students’ hands, and quickly disappears. Their college life of squeezing dollars seems to dissipate quickly. If they are living at home, they may feel even richer.
Salaries for your first job after college in 2019 will probably be in the $52,000 per year range, a 3% bump from Korn Ferry’s previous estimates. Salaries will be higher for majors like aerospace, software or mechanical engineers.
Your gross monthly income is $4,333. However, you will be paying your bills with your monthly take home pay, net of taxes, of about $3,300.
Start A Budget As Soon As Possible
The monthly income may seem like a lot of money to someone just out of college. However, it needs to support a lot of fixed monthly bills, including rent, utilities, student loan debt, public transportation or car payments, gas and health insurance payments.
Three musts that should be added to your fixed monthly payments are savings for retirement, emergency fund, and investing accounts.
There are variable expenses, largely discretionary. These costs include food (groceries at home and eating out), clothing, entertainment, personal care and services.
With that in mind, we can calculate average monthly expenditures for major categories drawn from the Bureau of Labor Statistics (BLS) Consumer Expenditures Survey of 2017, the last full year of publication. This survey tracks the average American as well as provides respective demographics.
Post College Demographic Consumer Unit
The post- college graduate after a few years in the workforce falls comfortably in the “25-34 years” group, with age of reference person being 29.8 years old. There are 2.8 people in this consumer unit, including a child under the age of 18 years old.
This household has 1.5 earners with 1.7 vehicles. Of this group, 75% went to college.
The 25-34 year reference person earns $61,145 aftertax annually or takes home about $5,095 per month.
Average total expenditures are about $4,610, falling into the following:
Housing is the biggest expenditure category at $1,660 per month
When you are just out of college and working at your first job, you will likely be renting an apartment with two or three other people. Over a period of time, however, as you move through your 20s, you will want your own place for privacy and potentially, a family.
Where you live will have implications on not just your housing costs, but your overall living costs. Living in an urban market like New York or San Francisco is much more expensive versus living in Columbus, Ohio regardless of whether you buy or rent.
Roughly 59% of this age group are renting while 41% are homeowners. Of this age group, 33% have mortgages.
Housing accounts for 36% of total expenditures. However, housing costs vary whether you own your home, pay a mortgage or are a renter.
This is a broad category and includes utilities, mortgages, maintenance, insurance, repairs, telecom, mobile, household supplies, furnishings, furniture, flooring, appliances, and household equipment.
On its own, utilities ( including gas, electric, water, telecom and mobile services) are 8% of your total housing costs. If you rent, some utilities may be included. Many homes have cut the cord and use mobile only though that may not work in some rural areas.
Be Cautious On Your Housing And Surroundings
You should keep your housing costs to 25%-30% of your total spending budget. Lifestyle inflation is going to play a big role in your housing costs getting out of control. If you want the biggest house in the high consumption neighborhood to “keep up with Jones” your costs could easily spiral out of control.
The house is often the least of the problem. Add in the decorator and furnishings, the luxury cars, the private schools, cruises and the country clubs, and other conspicuous spending, and suddenly your six or seven figure income is drained from spending and higher debt.
Food: $616 per month
What we spend on our food is dependent on the type of household we have. Our reference household of three, including a young child under 18, are eating home 54% of the time and 46% away from home. Food accounts for 13% of total expenditures.
As we all know, and I can attest in our household, eating out is far more expensive, especially when you add beverages.
It is a good idea to do comparison grocery shopping, use coupons wisely, eat out more prudently to save more. Food should account for 10%-15% of your budget especially if your household has four people.
Transportation: $760 per month
This category amounts to about 16% of total spending. It matters if you live and work in an urban market with access to a good public transportation system or need a car(s).
While NYC is super expensive, monthly metrocards are among its few bargains at $127 for a 30 day unlimited pass if you depend on the train. On the other hand, buying a new or used car, net of trade-in, car insurance, finance charges, gas/oil, and repairs, can be costly. You can eliminate about $58 per month if you are handy with cars.
You should aim to keep transportation below 10%-15% of your spending.
Gas, fuels, and oil cost $168 per month in 2017, lower than previous years, and can be a big swing factor. Shopping around for a used car that you buy outright and comparing vehicle insurance cost can bring down your monthly burden.
Cars are often a big part of our conspicuous consumption. For some, it is a functional device to transport us place to place. For others, the “dream” car has to go with the “dream” house. Resist spending that may go with your success and higher income.
A word about why budgeting is for everyone
In one of my favorite books, “The Millionaire Next Door“, authors Stanley and Danko portray the differences between the self-made millionaire and the typical wealth inheritor.
The one who became rich by working hard often bargain shops for low key used cars, saves and invests wisely. On the other hand, the classic wealthy person who has accumulated wealth through legacy tends to be a big spender for the sake of image. The latter exhibit similar traits to those in the early stages of lifestyle inflation, ramping about debt quickly.
Healthcare: $264 per month
This category is 5% of our total spending and largely associated with health insurance. If you are fortunate this may be substantially paid by an employer plan. Medical services, medical supplies and drugs account for the rest. As your family grows and especially ages, healthcare costs rise for the household.
You should target these costs to stay in the 5%-10% level.
Apparel: $170 per month
Apparel is just under 4% of total spending and certainly is a variable annual cost. For budget purposes, you could always use a rule of thumb of 2%-4% of your total spending.
More likely, families will spend seasonally or back-to-school and special events. For young families with young children, clothes could amount to larger expenditures because of outgrowing (sizing out) or fashion-conscious teens. Shopping wisely really matters whether in the mall or online to keep spending down.
Entertainment: $220 per month
We entertain differently depending on our age, our household, hobbies, video, sports, music and whether we have pets. These variable costs are something we can exercise some control over. It is may be harder when we have children, however.
Here, entertainment is a tad under 5% but may increase if you count eating out as part of entertainment.
Personal Insurance and pensions: $549 per month
Your social security payments are your contributions deducted from your paycheck and are picked up into this category. Also, here are life insurance, railroad retirement, government pensions, private pensions and retirement programs for the self-employed. This accounts for 12% of your monthly expenditures.
Education: $102 per month
Education is part of “Other Expenditures” but deserves its own mention. It includes tuition, fees and supplies for all levels of private and public schools, including colleges.
The relatively low amount may not fully reflect the burdensome student debt that is usually carried over a 10 year or longer time frame. Some students may accelerate their payments to get rid of their debt. Others pay just the monthly minimum which could be as low as $50 per month. Others make late payments.
Other expenditures: $269 per month
These are miscellaneous items that are largely personal care products, magazines, credit card memberships, legal fees, tobacco, donations, and alimony. This amounts to 5.7% of total spending.
Those that can give to their favorite charities should donate higher amounts. A rule of thumb we have used is 10% though recognizing that is not possible for every year and for everyone.
Related : 10 Ways To Better Manage Spending
Related: Saving For Retirement in your 20s
What Does Your Budget Look Like?
Monthly income of 5,095 less total expenditures of $4,610 for the average 25-34 year household leaves $485 or almost 10% of net income
Your “monthly savings” of $485 or $5,820 can be boosted a bit especially if you can keep your housing costs to 30% of total expenditures or less. Certainly if you are renting or buying a modest home, and able to get an affordable mortgage, your savings will have room to grow.
You should target savings to be at least 10% of your total spending.
To combat the likelihood of increased spending as your income grow, you need to have a plan in place:
#1 Establish an emergency fund for at least 6 months of necessary expenses such rent, student loan payments, transportation, utilities, phone, food (even pizza). You may be living on your own or with roommates and they’ll be expecting your monthly contribution.
#2 Set up a budget. Once you know what your take home pay, you should think about what your fixed and variable expenses are. Keep your housing costs from expanding dramatically as you grow your family. Consider a used car and paying cash. It is not unusual to quickly ramp up spending for entertainment, eating out, clothing for work and play as your earnings grow.
#3 Spending limits. The problem is that the new freedom you have to enjoy more things with your new paycheck, the more likely you will spend more than you should. You want to live well within your means so you can grow savings. Bargain hunt and consider ways to avoid impulsive shopping.
#4 Pay down debt. if you are living home initially after college, that is a great time to put some savings away for your emergency fund and towards paying off debt. Reduce your high cost debt. This is usually your credit card balances which grow faster. Instead, pay your credit card balances in full. If you can’t, stop spending with your cards.
#5 Student loan repayment has to be an important part of your priorities. Education costs from the Consumer Expenditures Survey may be understated. Your household may have higher student loan repayments closer to the national average $304-393 per month. Pay your fully monthly bill, not just the minimum for student loans.
#6 Consider increasing your loan payments. You may decide to pay more than your current student loan bill if you get a bonus or substantial raise. If you are able to handle paying back your federal and private (if any) student loans sooner that may be good. Look to pay the higher cost of debt first, usually the private loans.
If you buy your home or condominium, consider a shorter term for your mortgage, say 15 years versus a 30 year mortgage. The latter is a higher total cost because of the higher over interest costs.
#7 Retirement Savings. You may have a jump start to saving for your retirement if you began contributing to your 401K plan especially if your company has a matching contribution. There are tax deferred savings benefits. You need to save up to the amount that will trigger your companies’ matching contribution. Allocate some savings for an IRA/Roth IRA.
#8 Leverage the magic of compounding interest. Relatively small and regular contributions in your 20s amount to substantial savings for your retirement decades later through compounding interest. Making a monthly contribution of $800 for 30 years at an 8% rate produces savings of $1,203,223.29. The earlier you invest, the better your retirement grows.
#9 Diversification is an important strategy. It is always recommended that you diversify your investments among different financial instruments and asset classes such as real estate.
By diversifying, you can reduce risk by buying different kinds of stocks in different industries, even in different markets (US versus emerging markets). You can never eliminate risk or loss altogether but you never want to put all your eggs in one basket.
Taking advantage of retirement savings: 401K and Roth IRA
In 2019, the maximum contribution you can make to your 401K is $19,000, likely a steep amount to make if this is your first job. Do make some arrangement for some percentage of your paycheck to be withdrawn for your 401K. It is a good habit and important to start as early as possible given the benefits of earning on a compounded basis.
You should also open up a Roth IRA account to begin saving outside of work. In 2019, the maximum amount allowed is $6,000. Maybe you received some graduation presents from family which would be perfect seed money to put into these accounts.
At an early age, post college, you can learn to how to reduce spending, save more to pay down debt, create an emergency fund and invest in your future. What has worked for you when you are budgeting? What ideas have you tried that worked for your household? We would like to hear from you!
With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.