9 Ways To Avoid Lifestyle Inflation With A Savings Plan

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.

When we get our first job after college, we begin to earn money, get raises, bonuses, or change jobs for more pay. We conjure up what we had considered buying before this newfound financial freedom and spend it too quickly. Instead, we should be using this money wisely.

To avoid lifestyle inflation or lifestyle creep, we need to make a reasonable budget when we start our first job and throughout our career.

9 Ways to Use Our Savings

  • An emergency fund.
  • Set up a budget.
  • Spending limits.
  • Pay down debt.
  • Pay down student loan repayment.
  •  Retirement savings.
  • We leverage 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 phones and streaming through shared family accounts. Parents may provide their kids a monthly allowance or an emergency fund for miscellaneous expenses.

Students will most likely pay for lifestyle needs like meals and alcohol off campus, gas or public transportation, extra clothes, entertainment, gifts, personal items, and belong to clubs.

Working Through College Helps

The average full-time college student makes $195 per week and may stay on for winter break or summer. Many college students may work 30 hours per week or more at various 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 and part-time students who may work full-time jobs.

According to a Digest of Education Statistics (NCES), working students comprise 43% of those going full-time and 81% of part-timers in 2018.

What College Students Think About Money

LendEdu survey illustrates attitudes held by college students about personal finance topics.

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.

Budgeting/Emergency Fund

  • 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 most significant monthly expense, the most prominent 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 a vacation or a unique vacation.

This survey indicates that college students need to learn how to manage their money as they start their careers. After college, they are prone to lifestyle inflation, spending more of their income than they should. Instead, they should seek financial security and freedom long term. 

First Job Post College Leads to Lifestyle Inflation

A college student with fewer 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 soon. If they are living at home, they may feel even more prosperous.

The latest average salaries for your first job after college will probably be in the $50,000 per year range according to Indeed. Salaries will be higher for majors like aerospace, software, or mechanical engineers.

Your gross monthly income is $4,167. However, you will be paying your bills with your monthly take-home pay, net of taxes, of about $3,173. Budgeting is easier when you are younger and have fewer bills to pay. Start early and get into the groove of budgeting by finding a free mobile app (e.g., Mint, Personal Capital).

 Related: A Guide For College Grads On Your Company Benefits

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 many fixed monthly bills, including rent, utilities, student loan debt, public transportation or car payments, gas, and health insurance payments.

You should start a budget, using your current income, and add your fixed monthly payments such as rent, utilities, and groceries. Remember to pay yourself an amount that reflects savings to target money for your retirement, an emergency fund, and investment accounts.

There are variable expenses, mainly for discretionary spending. These costs include food (groceries at home and eating out), clothing, entertainment, personal care, and services. Track your spending on your mobile app or via credit card bills. 

With that in mind, we can calculate average monthly expenditures for major categories by age group drawn from the Bureau of Labor Statistics (BLS) Consumer Expenditures Survey of 2017. This survey tracks the average American as well as provides respective demographics.

Post-College Demographics Consumer Unit

After a few years in the workforce, the post-college graduate falls comfortably in the “25-34 years” group, with the age of the reference person being 29.8 years old. As such, there are 2.8 people in this consumer unit, including a child under 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 most significant 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. However, as you move through your 20s, you will want your 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 than living in Boise, Idaho, 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 broad category 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. Your utilities may part of your rent. Many homes have cut the cord and use mobile which may not work in some rural areas.

Be Cautious About Housing and Related Expenditures 

You should keep your housing costs to 25%-30% of your total spending budget. Lifestyle inflation is going to play a significant role in your housing costs getting out of control. If you want the most prominent house in the high consumption neighborhood to “keep up with the Jones,” your costs could quickly 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 items adding to your conspicuous spending tally.  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, eats 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 good 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 an excellent 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 significantly swing. Shopping around for a used car that you buy outright and comparing vehicle insurance costs can reduce your monthly burden.

Cars are often a big part of our conspicuous consumption. For some, it is a functional device to transport us from 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.

Budgeting Is For Everyone, Even Millionaires

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 last 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 is associated mainly with health insurance.  If you are fortunate, your employer substantially pays for the 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 at the 5%-10% level.

Apparel: $170 per month

Apparel is just under 4% of total spending and certainly is a variable annual cost. You could always use a rule of thumb of 2%-4% of your total expenditures for budget purposes.

More likely, families will spend seasonally or back-to-school and special events. For young families with young children, clothes could amount to more significant 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, household, hobbies, video, sports, music, and pets. These variable costs are something we can exercise some control over. It may be more challenging when we have children, however.

Here, entertainment is a tad under 5% but may increase if you count eating out as part of the entertainment.

Personal Insurance and pensions: $549 per month

Your social security payments are your contributions deducted from your paycheck and in this category. Also, there are life insurance, railroad retirement, government pensions, private pensions, and retirement programs for the self-employed. This category accounts for 12% of your monthly expenditures.

Education: $102 per month

Education is part of “Other Expenditures” but deserves its 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. Typically, students pay their loans over a ten-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, primarily personal care products, magazines, credit card memberships, legal fees, tobacco, donations,  and alimony. This category amounts to 5.7% of total spending.

Those that can give to their favorite charities should donate higher amounts. We have used a rule of thumb of 10% of spending though recognizing that is not possible for every year and 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.

Boost your “monthly savings” of $485 or $5,820 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 getting an affordable mortgage, your savings will have room to grow.

Monthly Savings Should Be at least 10% Of Your Earnings

To combat the likelihood of increased spending as your income grows, you need to have a financial plan in place: 

#1 Pay Yourself First

Allocate at least 10% of your earnings to go savings and allocate to paying off debt, emergencies, retirement accounts, and investments.

#2 Establish An Emergency Fund

Establish an emergency fund for at least six months of necessary expenses such as 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.

#3 Set Up A Budget

Put a budget plan in place once you know your take-home pay, you should think about your fixed and variable expenses. Keep your housing costs from expanding 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.

#4 Spending Limits

Spend within your means by tracking and limiting purchases. The problem is that the new freedom you have to enjoy more things with your latest 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.

#5 Pay Off Debt

If you are living home initially after college, that is a great time to put some savings away to pay off debt. Reduce your high-cost debt by paying your bills in full. Credit card balances grow fast on high interest rates. Instead, pay your credit card balances in full. If you can’t, stop spending with your cards.

#6 Student Loan Repayment

Have a plan for your student loan repayment. This has to be an essential part of your priorities. The Consumer Expenditures Survey may be underestimating education costs or in other categories. Your household may have higher student loan repayments closer to the national average of $304-393 per month.  Pay your fully monthly bill, not just the minimum for student loans.

#7 Consider Increasing Your Loan Payments

When you have extra savings or your income rises, pay down your student loans. You may decide to pay more than your current student loan bill if you get a bonus or substantial raise. If you can 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.

#8 Retirement Savings

 Jumpstart saving for your retirement when you start your job by 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. At the same time, allocate some savings for an IRA/Roth IRA.

#9 Leverage The Magic of Compounding Interest

Get familiar with the benefits of compounding to grow your money faster. Regular contributions in your 20s amount to substantial savings for your retirement decades later through compounding interest. A monthly amount of $800 for 30 years at an 8% rate produces savings of $1,203,223.29. Not too shabby! The earlier you invest, the better your retirement grows.

#10 Diversification Is An Essential Investing Strategy

When investing money,  you should diversify your investments among different financial instruments and asset classes, such as real estate. That strategy will help you reduce your risks. 

By diversifying, you can reduce risk by buying different kinds of stocks in various industries, even in foreign markets (the US versus emerging markets). You can never eliminate risk or loss, but you never want to put all your eggs in one basket.

11. Taking Advantage of Retirement Savings: 401K and Roth IRA

In 2021, the maximum contribution you can make to your 401K is $19,500, likely a steep amount to make if this is your first job. Make some arrangements for some percentage of your paycheck to be withdrawn for your 401K. It is a good habit and essential 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 2021,  the maximum amount allowed was $6,000 ($7,000 if you’re 50 or older). Maybe you received some graduation presents from your family, which would be perfect seed money to put into these accounts.

At an early age, post-college, you can learn 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!

 Final Thoughts

Avoid lifestyle inflation by carefully budgeting your spending so it doesn’t get out of control. Spend within your means and allocate your savings with care. Sure, you deserve treats in life but you want to make sure your costs don’t spiral out of control so you are constantly borrowing. Financial security and freedom are desirable goals so that you can achieve financial success and enjoyment in life.

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