This week’s guest post comes from AskDong.com. As an early 30-something from Boston, we have a lot in common.
I’ve been very fortunate in the last 9 years since college to have been able to increase my income every single year, but with that has come almost a requisite spending creep. I know I’m not the only one. MM over at pfblog.com clearly has suffered this as well. A mere 4 years ago, he thought $45K a year was enough. Today his estimate is $110K. Quite a jump. Some of that increase is understandable and difficult to account for when you’re young. Children are expensive, and expensive in ways that I probably can’t imagine, at least that’s what I can gather from people I know who have kids.
I’m not one to preach excessive frugalness. Life is too short to not enjoy it. I think if you can afford to splurge, you should go ahead and do it. However, at the same time, I think it’s important to understand your spending. It’s not only important to understand where you’re spending money but how your spending habits are changing, especially on budgetary items that are relatively fixed by contractual obligations. I include amongst these; rent, mortgages, auto loans and leases, insurance, basic utilities, and club memberships. That’s not an exhaustive list, but each of those items represent a continuing obligation that cannot easily be cut from one month to the next. Discretionary items such as cable, eating out, clothes, vacation, etc., while still difficult to cut, are more controllable. The other thing about contractual spending is that it often times leads to more discretionary spending. Having a car is probably the best example of this. By owning a car, I’ve not only burdened myself with auto repair costs but I also drive to places when I could be taking public transit, increasing the wear and tear on the car, using gas, and occasionally paying for parking. Having the freedom to go on more road trips is a great thing, but I shouldn’t forget that it comes at a cost.
I’ll be the first to admit that I haven’t done a particularly good job at limiting my own spending creep. Below is summary of what some of my expenses (the ones I have relatively good records of) have looked like for the last 9 years.
The annualized growth rate is 14.2%. Yikes. Luckily my base salary has increased at a slightly higher annualized rate, 15.2%. For comparison, I’ve included the CPI inflation data for the same period. I’ve been keeping pace with inflation and then some (actually a lot of some) given that the annualized inflation rate as measured by the CPI for that time period is 2.8%. While I know my other undocumented expenses haven’t increased at the same rate, it’s still a wake up call.
I think it’s important to expect a certain level of spending creep is bound to happen. For instance, I have no regrets about owning a car after 6 years of not owning one. However, I’m glad I was given a hand me down from my family, nor do I have regrets about living in a nicer apartment than I did a few years ago. Increases in spending are okay, but what needs to be prevented is rampant uncontrolled spending growth. Investors pay a lot of attention not only to the worth of their assets, but how they grow. Why shouldn’t they be just as concerned with the rate at which their expenses grow? Ongoing spending increases should always be supported by sustainable income growth. This is why bonuses (if you get them) should never be counted as part of any base income that you might base your budget on. A useful measure is looking at the ratio of spending increase to income increase. Spending growth to income growth must be at least 1:1 (i.e., grow spending at slower pace than income) and ideally much lower. Secondly, the main reason to stem spending creep is the reasons so many of us blog about personal finance – financial independence. You’re not financially independent if you can’t control your spending.
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It’s not right for me anymore, but the 10/10/80 method (“give/save/spend”) worked for me for a long time when it came to the spending creep. Every paycheck, I would give 10%, save 10%, and live off the other 80%. With every raise or bonus, my spending went up, but so did my giving and saving. That helped keep my spending somewhat in check.
One the biggest problems with budgeting for creep is that’s it’s not exactly creep. It’s often spending jerk. All of sudden you’re paying more for rent or mortgage or something like that. I mean whenever I get raise I direct most of it towards savings, so I never see it, but 6 months down the road I’ve signed a new lease for a new apartment for 20% more….
I definitely like to upgrade my lifestyle. One of the things that is nice about earning more money, is having the ability to spend it on a better internet connection, or more exciting holidays. I do try to keep the creep down, but I don’t want to live like a student forever.
Between me and my husband we’ve owned more MP3 players over the years than I can count, including Sansas, iRivers, iPods (classic & touch), the Ibiza Rhapsody, etc. But, the last few years I’ve settled down to one line of players. Why? Because I was happy to discover how well-designed and fun to use the underappreciated (and widely mocked) Zunes are.