Your parents never warned you about it and school definitely never taught you
about it but this one financial mistake is so pervasive that it affects a
majority of the world and up until now it may even be affecting you too and no
it's not credit card debt an upcoming recession or the automation and
elimination of the job you currently hold this financial phenomenon is much
much more detrimental and in this video I will share with you the money mistake
subscribe button below for more life-changing content when I started my
career management consulting it offered me many benefits like working with great
people and being part of some very exciting projects however one thing that
it didn't provide me was a sizeable salary when I first started working
after college I was earning $40,000 a year which may sound like a lot to some
people but with seven years of college under my belt and living in an expensive
city that $40,000 didn't leave me with much money at month's end luckily all my
peers were making the same amount of money so we knew that for the time being
we would need to be diligent in our money spending ways fast forward a
couple years and with more certifications of work experience our
salaries began to rise and within three years we were all promoted to a salary
of roughly $60,000 then something strange happened within a short time
after we received our pay increase I began to notice most of my colleagues
buying new cars and taking vacations at first I talked this up to coincidence
however one day I saw my friend Matt coming to work in an expensive new suit
and I asked him what inspired his new purchase he mentioned that he had been
waiting years to upgrade his wardrobe and could finally afford it now that he
had gotten his pay increase in this moment I came to realize the number one
financial mistake that most people don't even realize they're making in financial
terms Matt's behavior of spending more money as his income increased is what's
known as a lifestyle inflation and it is more formally defined as a situation
where people's lifestyle cost or standard of living improves as their
discretionary income Rises in Matt's example his lifestyle costs increase
hence the new suit as his discretionary income rose with the awarding of his new
promotion now lay silence Latian or lifestyle
creep manifests itself in two different ways with the latter being the one
mistake that most people are making which is ruining their chance of ever
becoming wealthy the first is through inflation in economic terms inflation is
defined as a general increase in prices and fall in the purchasing value of
money is why your parents used to be able to buy a loaf of bread for 50 cents
and that same loaf of bread is now three dollars over time prices increase and if
your income doesn't increase at the same rate then your purchasing power or
ability to buy that item has declined another example can be seen in housing
an apartment may rent for $900 this year but next year it will likely increase to
not hydron $30.00 the second reason lifestyle creep occurs is because we
choose to increase their standard of living as our income Rises it's the
exact reason that my colleagues bought new cars and took fancy vacations as
soon as they got the raises they have been deprived of being able to afford
these luxuries for so long and now that their income allowed them to afford
these things they pounced on the opportunity to increase their standard
of living the problem with this phenomenon however is threefold first it
can be difficult to bring ourselves back to a standard of living that we
previously had after we've been introduced to a new and higher standard
of living who would want to continue living a very financially tight
lifestyle if they were now making the kind of money that can buy them the
things they've always wanted this is what makes lifestyle creep so prevalent
and lifestyle creep can happen with just about anything it can happen with the
clothes we wear the food we buy or a choice of drink at dinner to much larger
things like our furniture homes cars and other potentially expensive luxuries or
hobbies second why cell creep can affect all parts of your life and is
particularly sinister because of how subtly can enter your life for instance
perhaps on a meager salary you were relegated to drinking a free coffee at
work however once you get your annual raise you begin to buy yourself
Starbucks every single day increasing your standard of living but also your
monthly costs finally succumbing to a lifestyle creep is a one-way ticket to
being stuck in the Trop I've talked about being stuck in the Trop in other
videos but it's basically when you lock your
into financial obligations which then limit the flexibility of your lifestyle
for instance if you buy a $50,000 car and have massive monthly payments it
would restrict your ability to then take a vacation invest in your 401k or change
jobs if you grow and tired of your boss and falling victim to lifestyle
inflation certainly leads people towards a trap so at this time you're probably
realizing times in your life when you've out allowed yourself to be subjected to
lifestyle creep and this is completely normal but that doesn't mean that's okay
let's look at an example of how lifestyle coupe can penetrate your
lifestyle and the cost of succumbing to this financial phenomenon let me show
you how this works say Jeff is a full-time student and works 20 hours a
week at a part-time job making minimum wage he earns roughly twelve thousand
five hundred dollars a year or $1,050 a month which is just enough to cover
basic costs like going out to eat on occasion and paying for his school
textbooks Jeff doesn't own a car lives in his parents basement yet on an income
of $12,500 still can't afford to buy many of life's luxuries in fact most of
his time spent in class consists of him daydreaming of moving out of his parents
house and buying a red sports car which he's wanted since he was a kid fast
forward four years and Jeff graduates and gets his first full-time job where
he is now making just over $30,000 a year Jeff gets his first pay stub and
was happy to see that he was now making roughly $2,600 a month which is a big
jump from the 12,000 Fonzie dollars he was making in college one day after work
Jeff passes by a car dealership and sees it used but very nice sports car and
decides to take a closer look Jeff ask the salesman how much the car
costs and he was pleasantly surprised that it was only ten thousand dollars
given that he has secured himself a steady job and is now making almost
$3,000 a month he figures that now was the perfect time to realize his
childhood dream of owning a sports car and signs of paperwork to buy the car
Jeff hadn't saved up the money to buy the car however so he decides to finance
the full amount Jeff does the math and figures out that his monthly car
payments will be roughly a hundred and eighty-five dollars a month which is
reasonable since he was earning $2,600 a month or $2,300 after talks the month
following this big purchase Jeff decides to calculate the cost associated
with his well-deserved sports car besides a hundred and $85 car payment he
also had to dis showed another hundred dollars on gas and $150 on insurance
making his total car related costs four hundred and thirty five dollars for the
month while this is higher than Jeff initially anticipated he figures that
it's no big deal based on his new salary as Jeff continues to work his
nine-to-five job he realizes that he has much more free time than when he was in
school and decides that now's a perfect time to seek out a significant other
however after numerous failed dates Jeff was starting to think that him still
living at home was becoming an issue so he decided they would look into
apartments to rent shortly after Jeff found himself a place
for $800 a month that includes all the utilities insurance and other expenses
associated with apartments let's stop and take a look at how much Jeff's
lifestyle has changed since he began making a larger income during his
college days Jeff was living on a shoestring budget
of $12,500 a year or a little under a thousand $50 a month was living at home
and was taking the bus as his main mode of transportation since getting his draw
up he's added a fortune thirty five dollar monthly car expense and an eight
hundred dollar apartment making his total monthly expenditures two thousand
two hundred and eighty-five dollars remember Jeff is only making twenty
three hundred dollars after tax meeting that he is now operating with a 99% burn
rate otherwise known as living paycheck to paycheck
the final thing that's changed in his lifestyle is his amount of stress
sure Jeff now has a nice car and in an apartment he can bring girls back to but
he's now too worried about his finances to enjoy any of these things and wonders
where he went wrong isn't buying more when you earn more a natural part of
life well I think that lifestyle croup can be
very detrimental to your financial health I do believe that small increases
in lifestyle overtime are permissible what's the point in working if you can
never reward yourself right however there's a right way and a wrong way to
handle lifestyle creep the wrong way as you saw in Jeff's case is ramping up
your lifestyle quickly without calculating the costs associated with
your decisions this left Jeff living paycheck to paycheck and having more
financial stress than was necessary instead Jeff should have spaced out his
lifestyle creep instead of trying to take it on all at once
for instance he could have taken on one new lifestyle increased at a time by
buying the new car paying it down while still living at home and then moving out
moreover instead of getting an apartment for just himself he could have gotten a
roommate and split his rent making his portion four hundred dollars instead of
the current eight hundred dollars just these two reductions in monthly costs
which amount to fob Jun $85 with Laura's burn rate from ninety nine percent to
seventy four percent which still high is a bit more reasonable not to mention
Jeff would still get to enjoy the benefits of having a sports car and
living on his own but what would happen if Jeff used that five hundred
eighty-five dollars to invest in an index fund how could that change the
trajectory of his financial life say Jeff wanted to retire at age 65 and
right now is 25 years old after we crunching the numbers and
realizing that he can live an enjoyable life on a more frugal monthly budget
Jeff determines that in his retirement years he can live off of forty thousand
dollars a year using the 4% rule this means that he will need 25 times its
annual living costs in order to retire or 1 million dollars if Jeff were to
invest that five hundred and eighty-five dollars he saved from reducing his
standard of living every single month from age 25 to 65 at 7% he would have
accrued just over 1.5 million dollars in fact at this rate of investing Jeff
would hit his million dollar target in 36 years making his new retirement age
61 as you can see sue Jeff's example
lifestyle creep is a subtle but powerful factor that can dramatically impact your
financial success in life well it's okay to increase your standard of living over
time it must be done in a responsible manner to allow you to avoid taking on
more financial stress than necessary and contribute to other financial goals like
saving for retirement or putting your kids through school so as your income
begins to rise continue to track your expenses and if you see that your income
is increasing much more than your costs then you will know that you're making me
right financial decisions thanks for watching if you want to go from the life
you have to the life you deserve then hit the subscribe button now
you
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