One way to get ahead financially is to prevent lifestyle creep. While you are building and amassing wealth, keeping expenses low accelerates the process. The goal should be financial freedom, which is having enough passive income to cover expenses. Isn’t it interesting how each phase in life you are able to reach just outside your means? If you qualify for a $25,000 car loan you will find the $30,000 car you absolutely love. Or if you qualify for a $250,000 mortgage—the realtor will show you your dream home at $275,000.
The story of The Beggar’s Bowl describes this well. One day a King was walking through his Kingdom and met an old beggar carrying a bowl. The King asked to help the beggar, but the beggar said there was nothing he could for him. The King insisted and gave the beggar gold coins that quickly disappeared into the bowl. The King’s counselors pleaded with the King to stop giving to the beggar but he kept putting more treasure into the bowl—the King would not be outmatched! When the King finally lost everything into the bowl he asked the beggar what the bowl was made of that could swallow up so much wealth. The beggar said the bowl is simply made up of human desire.
The College Budget
Not everyone goes to college and not everyone needs to go to college. There is that time after graduating high school though when you do not have a lot of money and you are not getting paid that much. I can remember stocking groceries for a whopping $7/hour part-time. Later after you graduate college or go on to make more money you look back and wonder how you survived. I also remember the times being simple and how little it took to make you happy.
I did not make it far after high school. I dropped out of community college and later failed out of a university before rethinking my decision-making. It was not until after I joined the navy and got some discipline that I was able to make it through college.
I think I got lucky by failing out of college early even though it felt like the opposite at the time. I did not rack up student loans and decided to major in electrical engineering because it would pay well. The college counselor suggested I take a year to explore—a trap I would have fallen for not long ago. Of course the colleges want you to stay an extra year, they are making a fortune off us! Instead I took the quickest and least expensive path to graduation.
My budget in college looked something like this:
| Rent | $450 |
| Utilities | $200 |
| Car | $200 |
| Insurance | $75 |
| Gas | $150 |
| Food | $300 |
| Cell Phone | $75 |
| Misc. | $150 |
| Total | $1,600 |
I lived in an old apartment with a roommate, drove a used Chevy Impala, and cooked a lot. The yearly expenses came out to be just around $20,000 give or take. If I made $12/hour, which is almost $25,000/year, I would be living pay check to pay check after paying taxes.
Resisting Lifestyle Creep
The first thing a lot of people do after graduating college or getting their first “real” job is spend money. A new world of options open up. An income qualifies you for car loans and mortgages. Credit limits also increase, leading to more consumer spending. Banks and advertisers are eager to put you in a position of economic slavery that will take decades to pay off. Resisting the lifestyle creep is the way to break the chains of crushing debt.
When I graduated college, it took me 10 years to get a 4-year degree. I was late to the game of getting a “real” job, but I learned a lot of lessons along the way. I continually self-educated myself on personal finance by reading a lot. Each new book I read opened my eyes just a little bit more.
I learned the first time in the navy that buying a newer car was nice, but not necessary. My Chevy Impala was paid off and the insurance was low. I had 5 years of no car payments with that car and it helped a lot with lowering expenses.
Similarly, with housing I did not rush to get a fancy apartment or home. After college I qualified for a $250,000 mortgage but opted to buy a house for $177,000 and put some sweat equity into it. I also got a roommate which was mutually beneficial in lowering our expenses. When I moved, I rented the house out and got an apartment again with roommates.
My eating habits also did not change all that much. I still prepared a lot of food and ate out sometimes when the occasion called for it. I did some simple calculations in my early 20’s with food budgeting and realized that people spend a lot of money on eating out. I saw most of my friends opting for convenience meals and started realizing that spending $10 a meal added up to $900 a month. If I could spend $300 a month on food, then I would save $600 compared to the average person or $7,200 a year. I have done this for the most part over a decade and invested the money instead. This has contributed quite a bit to my net worth over time. I sometimes get made fun of for eating cheaply, but my response usually is what did you eat two weeks ago for lunch?
Growth of Net Worth
Starting out it can seem difficult to gain momentum. I think failing early got me to realize the importance of being financially stable and through self-education I learned that keeping expenses low is how most wealthy people became that way.
I started tracking my expenses and my net worth in my early 20’s and it helped keep me focused on growing my net worth. The savings rate in those days were small, maybe $100/month. Over time the savings increased, and the expenses decreased.
Keeping the college budget well past college is when my net worth really started to grow in addition to the small investments early on that were starting to compound. I was making quite a bit more money but kept my expenses about the same. This allowed me to save the difference for investments.
Conclusion
I will admit that I have had some lifestyle creep over the last couple of years. I can afford it now but having a nicer apartment or nicer car really has had zero impact compared to having a less nice apartment or car to be honest. I am currently trying to work towards another house-hack with roommates and the next car I buy will be well used.
My perspective now is to invest for more passive income to the point where luxuries can be paid with it. Remember: invest the principal, do not spend it. The poor buy luxuries first and the rich buy luxuries last.
I think the lower you can keep your monthly expenses, the better off you will be. There are some successful people that still live paycheck to paycheck despite making well over six-figures. In an event like COVID-19, any loss in income could be trouble.
