Today I've got an awesome guest post from Claudia with TwoCupHouse.com! Claudia is one of the many personal finance bloggers I've been fortunate to meet on the interwebz lately that is destroying her debt in REALLY creative ways. Enjoy! ~M$M
In 2015, I turned 30, and I decided that 30 would be the year I embark on a journey of numerous self-improvements.Β To develop my plan for change, I reflected on what hasnβt been working in my life.Β In this self-reflection, a theme emerged: money.Β My personal finances had been in dire straits, a topic I write about often on my blog.
Currently, my husband and I are in debt to the tune of about $199,000; this total includes a mortgage on a 1,500 sq ft house, student loans and credit card debt.Β Ouch.Β Without realizing it, we fell into the trap of lifestyle inflation.Β Buying things we thought we βwantedβ (like a house) with debts we thought we βneededβ (like a mortgage) contributed to our inflated lifestyle.
Looking at all of our debts on a single piece of paper really forced us to take ownership of them, to identify what we had done to put us in this situation and to figure out what behaviors we needed to change to improve our financial future.Β If you have debt, I recommend trying a similar activity to better understand your situation.
How It All Began
In 2006, I graduated with two bachelorβs degrees and about $23,000 in student loan debt.Β Since I had a job upon graduation, I could have started making my student loan payments immediately, but I didnβt.Β Instead, I took two vacations, rented an expensive condo and bought a new carβand ended up in even more debt than before graduation.
Coincidentally, my husband was in the same situation having made similar mistakes when he graduated from college.
Because of deferment, I thought I had more money than I really had, so I spent accordingly.Β Having a full-time job that paid 50% more than all of my part-time jobs combined, along with student loan deferment, gave me a false sense of security; I had succumbed to lifestyle inflation by way of a big increase in income, a corresponding increase in spending and the accumulation of more debt.
How to Avoid Lifestyle Inflation
The current βmeβ wishes there had been someone in my life to show me another path, point out the mistakes that lead to the lifestyle inflation and provide suggestions for improvementβknowledge I seek for myself today in the personal finance community of bloggers.
Here are a few tips Iβve garnered this year that might help you avoid the trap of lifestyle inflation Iβve found myself in:
1. If you find a full-time job, save money first to pay your student loan debt.
When I was in college, I had a roommate and a couple of part-time jobs, so I was able to cover my living expenses (student loans covered tuition). As soon as I found a full-time job after graduation, I moved out on my own to an expensive condo, i.e. the first venture into lifestyle inflation.
If I had continued living with a roommate, I would have been able to apply at least half of my income to student loan debt; it would have taken me about two years to pay off my student loans.
2. If a bank says you can afford something, run.
Because a bunch of banks said I could βaffordβ the debts I have, I bought into the notion that debt is OK and the best way to get what I wanted. If I had avoided taking on additional debts (i.e. credit cards and a car loan), I could have paid off my student loans by now.
By staying away from banks and credit card companies, you can easily avoid new debts and maintain focus on paying off student loan debt.
3. If you have debts, sell what you can and apply the money to debt.
Our current debts include credit card debt, student loans and a mortgage. While I canβt pay off my student loans by selling my degrees, I can sell the tangible things I donβt use that we bought to fill our inflated lifestyle.
For example, weβve sold a bunch of stuff we havenβt used like digital cameras and furniture via eBay and Craigslist, which has helped us pay down our debts.
In a more extreme example of trying to get out of debt, weβre selling our house so that we can eliminate the mortgage; a two-bedroom, two-bath home is too much for the two of usβway too much space, way too much mortgage.
Eliminating the house and its huge mortgage payment will free up money to pay off other debts faster.Β Lesson learned? Sell what you can and avoid buying things you donβt need.
These are just a few of the things I wish I had known about avoiding the trap of debt and lifestyle inflation.Β But this is just the tip of the icebergβthere is much more to learn about personal finance!
About Millennial Money Man
Bobby Hoyt is a former band director who paid off $40,000 of student loan debt in 18 months on his teaching salary and then left his job to run Millennial Money Man full-time. He helps other Millennials earn more through side hustles, save more through budgeting tools and apps, and pay off debt. He is a personal finance expert who has been seen on Forbes, Reuters, MarketWatch, CNBC, International Business Times, Business Insider, US News, Yahoo Finance, and many other personal finance and entrepreneurship media outlets.
Comments
kay ~ the barefoot minimalist
Oh Claudia! That was SO satisfying! I too wish we had not fallen into those traps. You can almost see the bankers smacking their lips and rubbing their hands together with glee every time another sap falls for their “you can afford this” lines. Congratulations on getting yourself out of the trap early! π
Claudia @ Two Cup House
Hi Kay! Thanks for your comment! I think it helps if I remember that banks are businesses like any other, trying to make a buck (and I don’t have to give them all of my bucks). Ha! Lifestyle inflation was a problem for us, but it is possible to overcome!
Millennial Money Man
You bring up a great point – I wonder what bankers think when they know people are getting trapped in debt. I’m imagining it’s along the lines of “We didn’t force them to do it – it’s their choice!” Sad. π
Sarah Noelle
Wow, thanks for this post. I too am facing a great deal of student loan debt and need to be really vigilant about keeping lifestyle inflation at bay. In my opinion, though, there is one exception to the general rule of throwing all your money at your loans, and that is: retirement funds. I don’t have any math to back this up at the moment, but it just seems like good sense to keep contributing towards retirement to the extent possible, while also being aggressive about loan repayment.
Millennial Money Man
I had to contribute towards my retirement because I was a teacher at the time I was paying my loans off. However, I didn’t contribute any extra. A lot of that depends on if you have a 401k match through your employer or if you are investing in an IRA. 401k match = free money and a no-brainer! If you are investing in an IRA, you have to weigh if you’d rather risk your money for a potential difference in return over your student loan interest. For example: if my loans are at 6.8% interest, and I choose to invest my extra money in an IRA instead for a potential 7-10% return, is it worth putting that extra capital at risk for a .2-3% return? I would prefer to get the GUARANTEED 6.8% from my future loan interest back in my pocket by paying my loans off sooner, but that’s just me!
Claudia @ Two Cup House
I’m with M$M on this one. I contribute the minimum to my retirement plan to get the match, but no more. Factoring in the interest rates of my loans, and the S&P lifetime average, I’m better off paying the loans off and then reconsidering my investment strategies!
Jen @ Frugal Millennial
I completely agree with M$M. My employer does not offer a 401(k) match, so I’m choosing instead to pay my loans off as quickly as possible. The amount of interest that accumulates when your interest rate is 6.5-7% is just insane.
Fervent Finance
Lifestyle inflation is the pits. Luckily I’ve got my expenses right where I want them, and everything left over after paying the bills gets transferred to Vanguard. Luckily I don’t have the spending gene which helps as well.
Millennial Money Man
I’m not much of a spender either fortunately – although my wife and I would like to take more vacations!
Claudia @ Two Cup House
It would be great to be able to take more vacations! With everything happening this year, we decided against traveling this year–hiking staycations for us!
Claudia @ Two Cup House
I read your recent post about your expenses in the city–impressive that you keep them as low as you do! Reversing the lifestyle inflation we subjected ourselves to by moving to a small house has been one of the best ways to reduce our expenses!
Amanda @ Grad Girl
I’m living abroad right now and I’m so accustomed to staying within my means, but I’ll be moving back home to the States soon and I’m dreading it–everything there says we need more, more, more, which leads to more inflation. I’m so glad there are people out there who are fighting it, because it makes me feel like I can too. π Thanks for this post, Claudia!
Millennial Money Man
Wow – that’s really interesting. I’d love to chat about the differences in advertising!
Claudia @ Two Cup House
Thanks for the support, Amanda! It is definitely possible, but not popular, to curb consumption. We have found that aligning with like-minded folks in the PF and minimalist communities has helped us make the transition. Good luck in your move back to the US!
Anonymous
My son graduated with $25k in student loans and chose to move to CA with school buddies instead of attacking the debt by living with us after graduation. In my opinion, he has made so many wrong choices regarding finances that Im scared for him. He hasnt paid anything towards his student loans in 2 yrs and has increased his debt by getting a car loan and larger apt. I wish he would open his eyes before he drowns in debt. I dont know how to help him because he wont take our advice.
CW
Graduate Level Students Loans are meant for student undergoing graduate level careers like medicine, law, engineering, etc. They provide higher amounts due to the credit intensive nature of these careers but the uses are basically the same: tuition, transportation, accommodation, purchasing studying material, personal computers, notebooks, practicing equipment, etc.
These loans are provided only to people studying professional careers at participating colleges. Therefore, you need to check first if the university you are planning to attend to is registered on the lendersβ database. Most young students will be required to provide a co-signer in the US territory in order to obtain approval unless they work while studying and can provide proof of income and a good credit history.