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. To develop my plan for change, I reflected on what hasn’t been working in my life. In this self-reflection, a theme emerged: money. 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. Ouch. Without realizing it, we fell into the trap of lifestyle inflation. Buying things we thought we “wanted” (like a house) with debts we thought we “needed” (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. 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 bachelor’s degrees and about $23,000 in student loan debt. Since I had a job upon graduation, I could have started making my student loan payments immediately, but I didn’t. Instead, I took two vacations, rented an expensive condo and bought a new car—and 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. 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 “me” 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 improvement—knowledge I seek for myself today in the personal finance community of bloggers.
Here are a few tips I’ve garnered this year that might help you avoid the trap of lifestyle inflation I’ve 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 “afford” 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 can’t pay off my student loans by selling my degrees, I can sell the tangible things I don’t use that we bought to fill our inflated lifestyle.
For example, we’ve sold a bunch of stuff we haven’t 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, we’re selling our house so that we can eliminate the mortgage; a two-bedroom, two-bath home is too much for the two of us—way 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. Lesson learned? Sell what you can and avoid buying things you don’t need.
These are just a few of the things I wish I had known about avoiding the trap of debt and lifestyle inflation. But this is just the tip of the iceberg—there is much more to learn about personal finance!