There’s a lot of debate about what “living the American dream” looks like in these modern times. I would like to avoid any philosophical discussions about stoicism versus materialism and what it means to be ‘happy’. Rather than make any value judgments about what constitutes a good life, I think it’s best to keep things simple and state that living a life that makes you happy is probably the best strategy. The major problem is that sometimes things that you think will make you happy, won’t and those things can be real drags to your quality of life if they come with obligations via the phenomenon known as lifestyle creep.
Expensive gadgets, cars, clothes, and big houses can be incredibly awesome! I don’t think it’s a bad idea to treat yourself, however, what few people take into account is the long term unintended consequences of lifestyle creep. As you start to experience more and more success, it’s natural to want to adopt a larger and more extravagant lifestyle. This creates a problem when the cost of maintenance isn’t taken into account and you can quickly find yourself making more money but having less disposable income than when you made less money.
Causes of Lifestyle Creep
Stupidity and greed aren’t entirely to blame. Lifestyle creep is spurred on by the hedonic treadmill and sales people.
The hedonic treadmill is when you become desensitized to achieving your goals or amassing more wealth. Success gives you a feeling of euphoria, much like drug addicts experience with their drug of choice. Just like those drug addicts, eventually you develop a tolerance and crave more. More wealth and success by itself isn’t bad, but if the goal is always to “live a more lavish lifestyle” or “make more money”, you’re just chasing a dragon and you’ll never truly be satisfied.
While your brain is screaming “I want more!”, sales people are there to answer the call and sell you the next best thing that will make you happy and finally fill that void in your soul. When you apply for mortgages or auto loans, often the loan officer calculates what you can ‘afford’, but they do so by calculating the maximum pain you can endure without defaulting. Sure, based on your income, you may qualify for a $500,000 mortgage, however, after you factor in taxes, utilities, and upkeep you could be living hand-to-mouth as your paychecks are gobbled up by your dream house. Likewise, that new Mercedes looks hella-sweet when you first buy it, but will you still love it when you’re 2 years in to a 5 year auto loan?
You should take into account whether or not that purchase is going to put a significant strain on your finances. If purchasing that status symbol puts you in a position of living paycheck to paycheck and you’re stressed out all the time worrying about maintaining the house of cards that is your financial situation, then it’s probably best to hold off.
Why is it bad?
A lot of things can suddenly come up: child birth, job loss, changes in industry, … and without a proper cushion your options are limited and it becomes more difficult to respond to changes. This is a huge problem in America. A survey last year discovered that a whopping 62% of Americans have less than $1000 in savings and almost 60% of seniors aged 65 and older have only the minimum required balance. There’s nothing wrong with celebrating raises or increased revenues. It’s important to celebrate your wins to keep you motivated, however, when you celebrate by taking on more obligations, that limits your mobility.
There’s a parable about a high-jumping mouse that involves a sage finding a rat that could jump higher than any other rat he’s ever seen. The sage found the rat’s hole and found a huge lump of gold. He deduced that since this rat was so much wealthier than other rats, it made him brave enough to do things the other rats could not do. Sure enough, once the lump of gold was removed, the rat never jumped high again! The moral of the story is: “If you have plenty of resource, it gives you extra confidence.”
Don’t be a victim
Like the high-jumping rat, draining your resources to fund a lavish lifestyle can take the wind out of your sails and limit your options. To avoid lifestyle creep, you need to make sure that your expenses never outpace your income. Apps like mint are excellent for tracking small expenses such as that $5/day (or $1825/year) latte habit as well as loans and investment accounts. While it’s easy to get confused about how much you’re making when money is churning in and out, tracking money in and money out is the only way to ensure that you’re building a larger lump of gold every month so that you have the confidence and freedom necessary to maximize your happiness!