Avoiding Lifestyle Inflation is Key to Getting Out of Debt

Want to know the secret to how I paid off my student loans (and car loans and medical bills)within three years of graduating while also being the sole earner in my family? The answer: I avoided lifestyle inflation and focused on one thing at a time.

What is lifestyle inflation

Lifestyle inflation is when your expenses go up as your income goes up. When we think about lifestyle inflation, we often think about the big ticket items, like buying a house or getting a new car.

But I learned that the small, recurring expenses play an equally important role in lifestyle inflation.

  • Cell phone/service
    • “i”-stuff
    • $100 per month plans
  • Food
    • discount stores vs. trendy grocers
    • pre-made or pre-packaged
  • Fancy Pants lifestyle
    • salon services
    • designer anything
  • Entertainment
    • cable/streaming service
    • music services
    • concerts
    • restaurants
  • Memberships/Classes
    • gym
    • yoga
  • “Convenient” items
    • Single use (bottled water, paper plates, paper towels)
      • (Side rant: How did it ever become okay to use something once then throw it away? Great marketing plans because it made $!)
    • Individually wrapped
    • Anything drive-thru
      • (these items have not only a cost to our wallets, but also to our environment)
  • Small but frequent expenses
    • coffee/soda/vending machines
    • weekly lunches

Examples of lifestyle inflation

Housing

  • Nice apartment alone for $1,300 per month
  • Alternative: live in a studio, or get a roommate for $875 per month
    • save $7,500 in one year
      • (Note: Aim to have housing costs <1/3 gross income)

Daily latte

  • $3.78 x 7 days/week x 52 weeks per year
    • $1,375.92 for 1 year; $6,879.60 for 5 years
  • Alternative: make coffee at home, or at least bring your own cup for a discount

Weekly lunch

  • $10 x 4 weeks per month x 12 months
    • $480 for 1 year; $2,400 for 5 years
  • Alternative: bring lunch from home, or limit to monthly or special occasions

Weekly Yoga classes

  • $12 x 4 weeks per month¬† x 12 months
    • $576 for 1 year; $2,800 for 5 years
  • Alternative: Yoga at home (e.g., YouTube videos) or with friends, or free classes through work or in your community

Why Avoiding Lifestyle Inflation is Key

When you are trying to get out of debt, avoiding lifestyle inflation will be the most important tool you have. Here’s an example of how continuing to live as you did in grad school can help you overcome even hundreds of thousands of dollars in debt in just a few years.

Example

In this example, a psychologist graduates with $132,000 in debt. Following in the Debt Shrink’s footsteps, she keeps her expenses the same while on post-doc and uses the extra income to begin paying down loans. When she obtains a staff position (example salary based on the OPM General Schedule, which is used by the VA)¬†and continues to avoid lifestyle inflation, the debt is paid off in a few short years!

Gross income Change from internship Debt = $132,000** Debt Balance
Internship $24,014 What? I have to repay my loans?! -$132,000
Post-doc $42,310 +$18,296 $132,000 – $18,296 = -$113,704
1st year job (GS12-1) $73,375 +$49,361 $116,704 – $49,361 = -$64,343
2nd year job (GS12-2)* $75,821 +$51,807 $64,343 – $51,807 = -$12,536
3rd year job (GS12-3) $78,267 +54,253 $12,536 – $54,253 = +41,717

DEBT FREE!!!

*After 1 year of being licensed at GS12-1 you may be eligible for GS13-2, which is more than in this example ($90,161, which is $16k more than GS-12-1)

**This example does not include interest.

 

If you could pick one or two recurring expenses that you could cut how much would you save in one year? Five years? What would you do with the money?

 

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