The Lifestyle Inflation Problem

We work hard for our money, and we feel that our efforts should also show in the items we own, the choices we make and even the places we visit. It’s a matter of self-respect and a great motivator to work even harder, make better investments and climb up the social ladder.

Yet, these upgrades could be at the root of a dangerous problem that throws us into a continuous rat race for more money. Called the lifestyle inflation is the pressure we feel to spend more when we can afford it, lying to ourselves that it is a prize we deserve.

2018 McLaren Senna hypercar wheelanddoordetail

image: 2018 McLaren Senna

Why do we spend more?

The short answer is that we believe that things reflect our social status and our success, and we want to show off even if it means getting personal loans to do it. The external motivation is strong, we desire what others have, and we want to be able to keep up with the Joneses. Social pressure makes us get a new car as soon as we’ve changed the neighborhood or causes us to split expensive restaurant bills with our friends.

The internal motivations are also worth considering. The people who get swept in this whirlwind are usually the ones that built a successful career from scratch and who have always dreamt of having beautiful things and now are catching up.

If we can detach ourselves from material things and value experiences more than possessions, we could avoid this cycle entirely.

Cloudbreak superyacht

image: Cloudbreak Superyacht

Wealth and debt

Some wealthy people evaluate their financial power by their net worth and feel confident about making expensive purchases. However, this is a flawed approach, since the right indicator to compare it with is income and immediate liquidities. The key here is to think about the situation like in the case of a company. You don’t pay vendors and payroll from your total valuation, including fixed assets, but from current sales.

If most of your fortune is tied up in stocks, investments or even real-estate, you shouldn’t take that part into consideration when swiping the credit card. Keep track of your spending and avoid going over your earning not even with 5-10% monthly. Doing so every month can get you in serious debt in under 5 years.

As a high-earner, it is better to put a 70-80% threshold of your earning on what you can spend and never take out the credit cards unless necessary.

Franck Muller - The deep blue of the Vanguard Yachting, inspired by the marine depths

image: Franck Muller Vanguard Yachting

Fixing the broken record

Even if you are wealthy and you don’t intend to get loans anytime soon, you should still check your FICO score at least yearly. Any significant change could show that you have accumulated more debt. It can also indicate that you have missed some payments.

Believe it or not, this score can have a significant impact on getting a better job or even being admitted as part of a new  partnership, since it shows your ability to manage money, a skill that will always be in high demand.

If your spending style is chaotic and you rely too much on your ability to earn, it could be the right time to take a critical look at what you can afford and if it is necessary.

The worst situation is when your debts are so long overdue, they have been sold to third-party collectors and now show on your credit report and lower your score with 50-100 points. In this situation, use your finances to pay your debts as soon as possible and even get professionals to help you remove collection account from credit report.

To remove the root of all evil, you should create a long-term plan including exciting goals that make you happier than immediate material possessions. Focus more on making money work for you than burring them into things that fill an emotional void.

van cleef & arpels 2017

image: van cleef & arpels fb