A long time ago, a girl I was dating, asked me a question. The question was so bizarre I had to stop everything to digest it.
She asked me when I would start living according to my status.
I was confused. Status? What status? I have a status? What do you mean?
She continued. Well you make decent money. Yet you drive an older car. You live in a poor neighborhood. You should live in a better place and have a better car. You have a status to maintain.
I could not believe it. I read there are people who buy things to show wealth. Someone is yet to buy a Porsche for fuel economy.
But, to feel an obligation to spend… Spend to meet societal expectations… I have yet to come across that. Why would I spend my money to conform to what others expect of me?
Here’s my advice on lifestyle changes that save save money. Actually, it’s only one change, but it’s big. It will save you thousands (if not millions) and will simplify your life tremendously…
AVOID LIFESTYLE INFLATION
As you move thru various life stages, your income will (hopefully) increase. As your income grows so will your expenses. This is a definition of a lifestyle inflation.
The increase in expenses is usually part of “keeping up” with peers. Making sure you drive the “right” car, live in the “right” neighborhood, and have kids to go to the “right” school. It’s a status-related spending, a type of conspicuous consumption.
Consider a simple example. Say, I currently work at a marketing agency. My current salary is $80k/year. I’ve been doing some great work lately and I got promoted. My salary went up by 30%.
Currently I live in a less glamorous suburb of Detroit, called Madison Heights. I own a 3 bed, 2 bath home, 1450 sq ft. I bought this house for $145k recently. My current property tax is $2.6k.
Inspired by my recent financial success, I decided to move to more affluent suburb of Bloomfield township. A “right” neighborhood.
I bought a similar-size 1450 sq ft house, with 3 bed/2 bath, for $227k. My new property tax is $5.5k/year. (By the way, these are real houses and tax rates I found on.)
Assuming 4% interest rate on my mortgage, $29K down (20% of $145k) and $1k insurance, my payment on the old house is $854. My payment on the new house under the same assumptions is $1,465.
That’s an increase of $611 (71% hike). (I know that mortgage interest is tax deductible, but that wont change my message if you continue reading.)
Of course, things get worse. There are hidden costs of living in a wealthy suburb.
I notice that my neighbor is driving a BMW 5 series, while I’m still schlepping around in my Ford Fusion. So I decide to get a BMW too. Here’s the math: Ford Fusion costs $22k, BMW 5 Series starts at $50k. Assuming 6% taxes, no down, and 60 month loan at 2.9%, my payment will go from $420 to $1,050, about $600 increase (150% hike).
At this point, I have exhausted most of my 30% raise (assuming 30% tax rate, my salary would increase by about 1,400 per month). However, I have access to cheap credit, and I continue to “keep up.” Boats, private schools, plastic surgeries, even lawns are all part of maintaining status.
So, now I’m in debt. My new job is taking more time and energy, since I am getting paid more to work longer hours. I’m stressed out about my monthly payments and I’m overworked.
What should have been a road towards prosperity quickly turns into a highway toward financial ruin.
How to Avoid Lifestyle Inflation?
Here are my actionable strategies.
Stay Away from High-Income Neighborhoods,
There is no way around it. If you think you can live in a wealthy suburb and not engage in a lifestyle inflation, think again.
We are hard-wired to follow crowds. That’s what ensured our survival in the past. We have mirror neurons in our brain. The sole purpose of these neurons is to mimic other people’s behavior (and choices). Your willpower does not stand a chance against thousands of years of evolution.
Living among affluent residents has another negative consequence. Allow me to illustrate. Say you’ve been saving to buy a car of your dreams. You have been saving for a couple of years.
The car of your dreams is BMW 7 Series (price tag $94k). You finally saved enough and bought your coveted vehicle. As you pull up to your house in a shiny BMW you notice your neighbor just bought Bentley Continental GT ($200k vehicle). That’s a better, shinier, and more expensive vehicle.
How would you feel towards your BMW now? Are you still excited about it? Probably not. You might even hate it now. What you are experiencing is called relative deprivation.
It is relative, because your car (while being very expensive) is worse than the Bentley. It is deprivation because you think you are entitled to have the Bentley as well. But you cannot afford it.
The irony is you just bought a $100k car and yet you feel poor.
Reduce Advertising Exposure
There are two problems with advertising. First, it puts ideas in your head. It does so subtly.
When you are exposed to advertising as an adult, you have enough critical reasoning skills to question its premise. If you want to question it, of course (many people don’t).
However, if you were exposed to advertising as a kid, you grew up accepting these ideas without questioning. You grow up thinking you have to maintain status, for example. Buy diamonds. Wear a Rolex.
Advertising has been successful in propagating the idea that you deserve/worth/entitled to (insert an item). The message is so widespread and common, we get comfortable with the notion that self-worth = having/buying something. And that you have to spend to maintain or show your worth.
This strategy, especially, works for things we don’t really need: Jewelry, beauty products, luxury items.
That’s why the advertising strategy for these products is to link spending to self-esteem, or to self-worth. Consider this famous example:
Here, your worth is explicitly linked to a product. As a product gets more expensive the link gets more subtle, more nuanced. Here’s an example:
Here, the relationship between the product and self-esteem is less explicit. Bill Gates is important -> has Rolex watch -> are not you important? -> get Rolex watch too. And, just like L’oreal, Rolex managed to put the word “worth” in the ad.
I like the watch ads especially because you can buy a watch for $10 in Walmart. Functionally, this watch is no different from a Rolex. Also, almost everyone has a cell phone, and it has watch in it. You don’t really need one now.
So to make someone spend thousands on watch you have to really dig deep inside the person’s psyche. Here’s another one. This watch will show everyone what you are made of… Who you really are…
Do you see a pattern?
Because there’s no limit to your importance or self-esteem, you will keep spending to uphold it. Brilliant strategy.
The largest source of advertising is TV. Stop watching TV.
Another problem with advertising is it encourages over-consumption. It induces you to buy shit you don’t need. Or at least don’t need right now. You can drive your car for another year, but you can get a C Class Mercedes for only $399/month if you act now! At these prices, you lose if you don’t buy!
Practice Mindfulness (Buddhism)
Completely different strategy, albeit the weird one.
Let me preface. I’m not telling you to change your religion or join a Tibetan monastery.
Moreover, I’m not a Buddhist (I do meditate). I just take what I need from the doctrine and leave everything else out. So, I will list a couple of relevant concepts from Buddhism and a specific technique on how to put them in place. I’ll list resources below my post if case you need to read more.
First, the mindfulness teaches us to accept the present situation. We all spend hours imaging how different our life would be if we had something we don’t have right now. Better spouse, better house, better car, more money, more stuff, etc, etc.
One book described this tendency as a “mental time travel.” Not only does mental time traveling rob us from real-life experiences. It actually makes us miss real life.
Practicing mindfulness will make you more content with what you have. And importantly, with what you don’t have.
Second, Buddhism teaches us that there’s no concept of self. It’s an artificial construct of the thinking mind. The thinking mind is part of the mind that generates thoughts. It’s a part that’s responsible for continuous chatter in your brain.
Since we are the product of our thoughts, and those come and go, the idea of self is a response of the thinking mind to make us feel more permanent.
The implication of this is intriguing.
Imagine how many times do you get tortured by inner critic for not being good enough? In comparison to your ex, your ex’s boyfriend, your coworker, your friend. You are not as successful, not as thin, not as smart, not as rich, not as strong, not as beautiful, not as fit, etc etc. All these thoughts are the product of continuous comparison of your self to others. Now imagine, there is no self.
Suddenly, all this mental torment is gone. After all, if there is no self, then all this comparison is meaningless.
And all those ads targeting your ego are suddenly useless as well.
Finally, purchasing decisions (especially decisions to buy status items) are inherently emotional. Say you want to buy a watch. Functionally speaking, there is no difference between Timex and Rolex. Yet, the emotional impact of buying Rolex will be greater.
How Does Mindfulness Work
The part of the brain in charge of emotions is called the amygdala. It is a more primal part of the brain; it evolved first and is found even in reptilians.
Research showed that Buddhist monks have smaller amygdalae and much thicker pre-frontal cortices. The pre-frontal cortex handles concentration, awareness, and decision making. The pre-frontal area has evolved recently (evolutionary speaking) and is found in mammals (i.e in more complex brains).
Furthermore, the functional connection (times the areas of the brain move together) between amygdala/pre-frontal cortex and the rest of the brain gets weaker/stronger. Basically, your higher level areas of the brain start dominating lower-level areas. You are managing your emotions/feelings/compuls
The scale and magnitude of changes are directly correlated to the number of meditation hours.
Which brings us to my next point. There’s only one way to attain these benefits. It’s meditation.
Meditation is sitting down with your eyes closed and concentrating your attention on your breath. Your attention will wander from time to time, and you gently bring it back. Look at the resources at the end for more information.
Meditation is a deliberate practice to disassociate yourself from your thoughts. It took me about 2 years to understand that.
When I first started meditating I thought the goal was not to have any thoughts. I was wrong.
The goal is to watch your thoughts without identifying with them. Buddhists compare the process to sitting on a side of the highway and watching cars passing by. Sometimes you jump on one of them and it takes you down the highway. But then you remember, get off, and watch cars passing you by again.
As I practiced my meditation, I became aware of what was going on in my head. I start realizing that my thoughts are not me. They just come and go and some of them make me feel a certain way. I don’t have to react to them, though I often do.
If I learn that my neighbor has just bought a new car. Or my coworker made more money than I did, I observe thoughts that pop up in my head. I see them come and go and I notice how they make me feel. I also remind myself these ideas and emotions are not me. If I choose to identify with them, I let these ideas hijack my mind. I let them define me.
I used to ruminate about injustices (either perceived or real) I had in my life and people who caused them. I would get angry and filled with rage as I replayed these situations again and again. When these ruminations happen now, I ask myself if I am being taken for a ride.
I still get angry/mad/jealous/upset, but the intensity of emotions is weaker and its duration is shorter.
If you practice meditation on a regular basis, it will make you content, accepting of yourself, and emotionally stable. You are less likely to overspend, make a bad financial decision, or engage in compulsive shopping. Meditation has the potential to benefit you in other aspects of life as well.
Unfortunately, this strategy requires time and determination. For it to work, it has to become a habit. But, it took years to become who you are, so it will take years to change how you think.
Books on Mindfulness:
- This app helped me to build a regular daily practice (the app is free): Headspace
- Mindfulness in Plain English
- Get Some Headspace: How Mindfulness Can Change Your Life in Ten Minutes a Day
- Buddha’s Brain: The Practical Neuroscience of Happiness, Love, and Wisdom
Academic Research on Mindfulness:
- Brown K.W., Kasser T., Ryan R.M., Alex Linley P., Orzech K. When what one has is enough: Mindfulness, financial desire discrepancy, and subjective well-being. (2009) Journal of Research in Personality, 43 (5) , pp. 727-736. (this article describes relationship between financial desire discrepancies (the gap between current and desired states) and mindfulness. Study 1 revealed that mindfulness was associated with a smaller financial desire discrepancy, which helped explain a positive association between mindfulness and well-being in undergraduates. Two further studies with working adults showed that these results occurred independently of financial status and changes therein. A final, quasi-experimental study with mindfulness trainees extended these findings. Reasons why mindfulness may help to promote the perception of having “enough” are discussed.)
- Shian Ling Keng, Moria J. Smoski, Clive J. Robins. Effects of mindfulness on psychological health: A review of empirical studies. Clinical Psychology Review Volume 31, Issue 6, August 2011, Pages 1041-1056 (the article states that mindfulness brings about various positive psychological effects, including increased subjective well-being, reduced psychological symptoms and emotional reactivity, and improved behavioral regulation)
- Jacob Piet, Esben Hougaard. The effect of mindfulness-based cognitive therapy for prevention of relapse in recurrent major depressive disorder: A systematic review and meta-analysis. Clinical Psychology Review Volume 31, Issue 6, August 2011, Pages 1032-1040 (the article concludes that early phases of mindfulness training, could be associated with significant improvements in selective and executive attention whereas the following phases, which are characterized by an open monitoring of internal and external stimuli, could be mainly associated with improved unfocused sustained attention abilities)