Overcoming Lifestyle Inflation

While the Fed and the media are focused on the rising consumer inflation levels, it seems like consumers have turned a blind eye on another type of inflation that affects them much more than the general increase in prices of basic commodities. Lifestyle inflation, as it has been called, refers to the rising prices that consumers pay for products and services over the years due to the choice of their lifestyle. A good example of lifestyle inflation is the price of a 2 liter bottle of Coke. Depending on where you buy it, you will pay between $1 to $2 even if bought from shops on the same street. That is to say that a bottle of Coke would cost more in Whole Foods Market, a high cost grocer, as opposed to Walmart, which prides itself as a low cost supermarket.

So why would anyone want to pay almost $2 for 2 liter bottle of Coke from Whole Foods Market while they they can pay less for exactly the same product at a Target store a few hundred yards down the road?

Sample this. Paul is a full-time college student earning just above minimum wage and working his butt at a gas station just to pay for his up-keep. He drives a 8 year old 1981 Toyota Tercel that has crisscrossed the breadth of America ten times over that he bought for $150 from his mechanic after his previous jalopy died on him one cold winter night. With his short credit history, no lender wants to give him a credit card and has to get a co-signor for his apartment. Paul works his way out of college and into his first job. With a college diploma to his name, he gets himself a real job that pays $52,000 per year. As soon as he gets his first bi-weekly paycheck, he pops into the auto dealer and buys a new Toyota Camry that befits his new status. How else are people supposed to know that he is no longer the broke student that he used to be. In addition to getting a car note, he moves into a better apartment that not only comes with a gym but also an Olympic size swimming pool.

Fast forward 15 years later, and Paul has climbed up the corporate food chain. At work they now call him the boss and it would take a at least 5 college students working overtime to earn as much as he does. Apartments are a thing of the past, he'd rather be shot dead than be seen driving anything less his brand new Cadillac Escalade. If anything, he is thinking of trading in the one year old SUV for the latest Mercedes Benz S class. In addition, he's married with 3 kids, a Labrador and a drive way that leads to his 3 car garage McMansion.

Come every end of the month and the mail man has to deliver Paul's mail in a carton box. The high-end living means his bills can't fit in the regular mail box. With every promotion at work, he's refinanced his mortgage or moved into a bigger house. His tax refund is normally used to pay the deposit of either a new car or for the summer family vacation. When he gets a pay rise his first stop is his local Best Buy store where he buys the latest wide screen TV to add onto the several TVs that he owns. With the six figure salary, he is barely able to pay off his bills. Just like his students days, he is going through the same struggles of living from pay check to pay check and has a wad of credit cards to show for it.

A few offices away from Paul sits Charles whom he shared an apartment with during their student days. Chuck has also risen through the ranks and heads another department. He drives a Honda Civic that he bought when he was promoted to the position of a manager 7 years ago. He has lived in the same house, which located in a good school district, for the last nine years. Chuck knows where to find every item at his local Walmart store. He also knows most of the associates by name because he's been shopping in the same store ever since he moved into the neighborhood. He brown bags his lunch everyday and no one at work can remember the last time they saw him at the vending machine.

Even with the dot-com bubble, Chuck's 401k and IRA accounts hold more than half a million dollars and his stock broker calls him every month asking him to buy more stocks with the $100,000 in his non-retirement money market account. On the home front, Chuck is almost done paying off the mortgage on his first home, that he now rents, and in 8 years he'll be done paying the mortgage on his residence. His tax refund, usually in the range of $3,000, goes to his favorite charity that educates and supports orphaned children in Asia. When it comes to the annual family vacation, he saves for it instead of paying for it with a credit card. In addition, Chuck went back to grad school, took night classes and got himself a master's degree that was paid for by his employer's tuition reimbursement program.

In both cases, Paul and Chuck graduated together, joined the same company and rose to similar positions but Paul is in debt to his eyeballs while Chuck's only liabilities are the mortgages he has on the two properties. Unlike Paul, Chuck maintained his frugal lifestyle while his friend lived on the fast lane. While both individuals are by no means poor or lacking in anything in their life, one of them has more than he needs and he usually pays more for it than the other. The disparity in their lifestyle makes it hard for those who know both of them to believe that they are at the same management level at work and it is the norm for their friends to wonder what Chuck does with his income.

There is no secret as to how Paul spends his money. Every dime and increase in wages goes into his unaffordable lifestyle. His expenditure is always higher than his nett income. On the other hand, Chuck's expenditure trails his gross income and that gap continues to grow larger every year. He buys what he needs and keeps his assets for as long as possible to ensure he gets the full value of his money. He has kept his debt in check and makes it a point to pay-off his debts as fast as he can. In addition to living within his means, he saves as much money as he can and increases his savings target every year. Most of the difference between his paycheck and expenditure goes into his savings and he also re-invests any interest, dividend or rental incomes that he gets from his investments.

While some people may argue that Paul is enjoying life more than Chuck, I'd like see it differently. In my view, Paul is struggling to keep up with his lifestyle more than Chuck. If anything, Chuck is financially independent and has a greater peace of mind than his friend Paul. I would also like to believe that Chuck is facing the future with confidence and looking forward to his sunset years when he will he retire and comfortably enjoy life without having to worry about his financial affairs. He'll also probably give his kids a head start in life cause he can afford their college tuition and live them with a rich inheritance.

If you ask me, I'd rather be in Chuck's shoes than Paul's. Enjoying life does not consist of having material possessions. There is more to life than instant gratification which in turn comes with a high price tag attached to it. As much as I'd like to live comfortably, I wouldn't want to live like Paul even though once in a blue moon I find myself in the fast lane.