I hope everyone indulged themselves over the Thanksgiving holiday because now it’s back to work!
Today, I’m going to focus on Lifestyle creep. Some of you may even be wondering what the heck I’m talking about. I looked it up and here’s the definition.
Lifestyle creep, also known as lifestyle inflation, is a phenomenon that occurs when as more resources are spent towards standard of living, former luxuries become perceived necessities. An individual’s discretionary income could increase because of increased income or decreased cost, such as paying off a mortgage. As discretionary income increases, individuals are able spend money on things that were previously unaffordable. Lifestyle creep occurs when spending increases at the same rate as income. It can be reflected in purchases, such as expensive vehicles or a second home. Spending money on things with ongoing maintenance costs, such as club memberships, also are demonstrated in lifestyle creep.
If we break this down into layman’s terms it means this. The more money you make at your J.O.B. the more money you spend on frivolous things or doo dads as Rich Dad Poor Dad explains in his series of books. What does this look like?
It looks like this – let’s say you earn $5000 per month.
Mortgage is $2000
Household expenses $1500
Car Payment $350
Credit card debt $300
Leaving you with $850 left over a month.
What do you do with the extra money? Well, what you should do vs what you do with the money are too different things.
The neighbor comes over one day and is sharing this amazing story about the boat he just bought and the deal the dealership just made him. He tells you that he just bought a brand-new boat and he’s only paying $350.00 a month. You go look at his boat and think wow, I wonder if I could get a brand-new boat for around the same amount each month – I have $850 a month not doing anything. This could be doable! Your buddy takes you to the dealership and low and behold you find the boat of your dreams. You know the dream you never had until you suffered from FOMO. (Fear of Missing Out). Not only do you buy the boat, but you also put it on your credit card because your credit score is outstanding, and you have a high available balance because of your score and maybe because you pay your bills on time. But you think to yourself – I use my credit card because I’ll get points to use towards a free airline flight or gift card to Home Depot. Never mind the 24% interest rate you’ll pay – but your payment only increased by $400. Yes, your boat is a bit larger than your buddy’s. We also must “one up”, you know!
Now, you have $450 left each month. However, when you bought the boat, you didn’t calculate the Insurance costs, storage fees, maintenance, and fuel. Fuel for a boat is off the chart, let alone during an inflation crisis. But in the back of your mind, you are counting on raise that’s expected in 3 months. Your last raise was 3% so even if it’s 3% that’s another $150.00 a month. You now believe that with the $600.00 left over it will be enough to store the boat at your buddy’s house, pay for insurance and fuel.
We all know this example is an extreme case but I’m confident you understand how we all get caught up in Lifestyle Creep. We want to “look” the part for everyone on the outside – after all nobody knows what you pay for things or what your monthly expenses are. It’s easy to hide but it’s also easy to look at the doodads a person has and easily determine they are in debt up to their ears. Then you know what happens? You sell the boat because it’s too expensive to keep.
Just this morning, I was leaving for the gym. What do I see? I see a brand-new jacked up and lifted F250 pulling a brand-new boat. I didn’t think anything of it, until I noticed the truck and boat were painted to match. You could say I was profiling but all I could think of is – WOW, that dude is in serious debt. I wish he had given me his money to invest that way he could afford his doodads.
Here’s deal – I’m guilty of this too!
For the 25 years I spent in corporate America – I was also living paycheck to paycheck and buying things that I technically did NOT need. Why did I do this? Because I could!
I would buy brand new trucks every 3-4 years. I’ve always heard the minute you take a brand-new vehicle off the showroom lot you’ve lost 10% of what you paid. My $50k vehicle is now only worth $45k. Which means if I tried to sell it the next day, you’d only get $45k for it. I never tried to sell a vehicle after I bought it, so I didn’t care. Then I had leftover money, so I went and bought Harley, with the Harley I needed a trailer, and the plot thickens and continued. It continued until I was ready to quit playing the game! Think about it, you’re in a ferocious circle. Work, get paid, pay bills, buy something new (because it’s a false sense of FUN and living life!), work more hours, get paid, pay bills, no vacation because I’ve got to work. Once this cycle has repeated enough or you’ve become older let’s say your now in your 40’s you begin to think…is this what life really means to me? Work, get paid, pay bills, rinse, and repeat.
If any of the examples above sound like you, you’re in the Rat Race. This is a term that Robert Kiyosaki came up with and even created a board game called the CashFlow Game to help teach you to get out of the rat race.
This rinse and repeat became so mundane to me that I noticed I truly wasn’t happy and with employers putting so much pressure on you, that’s when I decided to find a way out. My career in corporate began in 1997 and it lasted until 2009 but I stayed in my industry for 25 years. I knew in 2000 that corporate America wasn’t for me and that’s when I bought my first rental property and began changing my identity.
I also began to realize that I needed to change but I didn’t want to give up my “lifestyle”. How did I do that?
I changed my mindset. What did I do first?
Cut up the credit cards! I cut my “lifestyle of the rich and famous” to shreds! I no longer use credit cards. Now, I do have one credit card that I have available for emergency use only. I don’t even carry it with me. I don’t care about those lousy points anymore. I recently reevaluated the card I had and reduced this card to a no annual fee card! They tempted me with a free airline ticket and companion ticket – phooey on you, if I want to go somewhere, I’ll find a flight when I need it.
I reviewed everything that I was paying extra for. I used to have a vanity license plate that cost an extra $35 a year – not anymore.
I had several subscriptions that were automatically deducted each month. I don’t need special apps on my phone to conduct the business that I do. They are all gone. I’ve scrutinized every bill, insurance policies, Internet, phone etc. When I first did this, I saved myself thousands of dollars! None of these changed my lifestyle it enhanced it and put more money back into my pocket!
I took the money I saved and started investing more into my real estate and my portfolio grew, creating cashflow.
Today, everything I own, I own outright. My truck is now 14 years young. I only have good debt. Good debt as described by Robert Kiyosaki is used to buy assets puts money into your pockets and makes you rich (like rental properties or short-term rentals).
Bad debt is used for consumption, takes money out of your pocket, and makes you poor – like a boat/car or your primary residence.
Which would you prefer?
It really pays to take Lifestyle Creep and throw it like shot put! I don’t miss it because now, I’m enjoying life the way I want to enjoy it! I can travel when I want to and there’s no J.O.B telling me when I can and cannot go and for how long! I get to decide!
If you want pointers on how you can begin your transition, send me an email to Info@fearlessinnovator.com.
I am looking to interview others that may have a compelling story to share about your journey into real estate investing. If you’re interested reach out to me at http://www.fearlessinnovator.com.