Lifestyle Inflation: American’s Financial Façade

     There is an unfortunate epidemic infecting both the old and young. An infection that goes unnoticed and affects too many Americans. It’s something we see every single day and yet no one addresses it. 

     Lifestyle-Inflation. The façade that too many Americans put on. I'll tell you what it is, why we do it, how to fight it, and some more.

     Lifestyle Inflation is when an individual increases their spending as their income increases. So essentially see money, get money, spend money, have no money. Let me give you a proper example. A person gets paid $32,000 a year, they spend $28,000 a year, then they get a raise to $52,000 so they increase their spending to $45,000 a year. Then they get another raise to $78,000 a year, so they now spend $70,000 a year. And the demented cycle continues. Now you may be asking “Hold on for one-second, chum.  Wasn't our person fine with living off $28,000 a year? Why are they spending so much now?”  That is where we get into the wonderful and dreadful human psychology.

     Listen, I am not a shrink, psychologist, or therapist. But hear me out for a moment. Have you ever noticed one of the very few behaviors toddlers have? I mean literally, every toddler does the same thing. They all show off. Seriously after they're done stuffing crayons in their mouth. They’ll immediately turn to their parents and go “Look at me.  Look what I can do!”  or “Mommy! Mommy! Watch this!”  or “Daddy! Look at Me!” The reason that toddlers do this is because we are creatures that are naturally prideful and flamboyant. This is why when we are young, we naturally like to show off to others. However, it's awkward if a 30-year-old man is saying “Everybody look at me! Watch this!”  This is where we get into Veblen goods.

     To understand Veblen goods and why we buy them. we need to understand Giffen goods. 

Giffen goods are low-income non-luxurious goods that everyone can get their hands on. These are wheat, rice, milk, eggs, plain clothes, etc. The supply and demand for Giffen goods generally stay about the same since most Giffen goods are cheap necessities. But even so, when these goods become, cheaper demand goes up.

     Then there are Veblen goods. Veblen goods are high-quality luxurious goods used mostly as status symbols. These are things like jewelry, luxury cars, champagne, designer clothes, etc. But something weird happens with the supply-and-demand curve. As the price increases for the product, the demand follows suit. That's because of the last clause in the definition. They’re status symbols to say without actually saying “Look at me! Look at how successful I am everyone!”  

     Let me give you an example. Your neighbor has just bought a new Mercedes, even though he could've bought a Hyundai which is identical to the Mercedes. He paid a higher price for the Mercedes to say without saying “Look! Look at how successful I am!”  There are a multitude of reasons for doing this. Self-validation: They feel they need to spend that money to fit in.  It’s how they were raised.  Competition with those around them.  Validation from others.  And there are so many more damn reasons. Although the real problem isn't showing off. It comes when people begin to view Veblen goods as necessities.

     You see, having a good income and rewarding yourself with some Veblen goods is fine; if anything, it’s encouraged.  Let’s say you just got a new job with a nice six-figure salary. Go ahead and treat yourself to a nice dinner. As a gift to yourself, get that new luxury car you have been wanting. The real problem comes when people begin to view Veblen goods as needs, not wants. So when a person gets these pay increases, they feel that they need to spend all of their money because that's all they know and have learned to do. But the saddest thing is what follows suit after spending all of a person's money. 

     If you haven't noticed, if a person is spending all of their money on Veblen goods, then they're not saving nor investing. So when a person doesn't save or invest for their future, they come to an old age where they can no longer work and either get laid off or are forced to retire. But they got no money, no assets.  And chances are, they decided to rent a house and not buy a house, which means they are dead broke going into their retirement. They now need to find work, any work from anyone, which is how people become the door greeters at Walmart. 

     This is why I've said in multiple papers “Live under your means!”  I’ll give you an example of what I'm talking about. You make $32,000 a year and spend $28,000 a year. You then get a new job and get $52,000 a year but you still only spend that same $28,000. You then get a big promotion to $102,000.  This is when you can spend some more money, so you spend $40,000 a year. You need to simply not spend a majority of your money, but instead save and invest that money for your.

     The only person who cares about how much money you make is the IRS, and it’s just so they know how much money to take. It’s absolutely fine to buy luxurious goods. 

Now hold on a second, there are two things you need to remember before swiping that credit card:  Make sure you can realistically afford to buy the item. If you can’t tell if you can afford the goods, think to yourself “Could I buy two of them?”  If the answer is no, then DO NOT BUY IT. The other thing is to make sure you buy it because YOU want it. Not to have people around you validate you for your spending. Because in doing, so the pieces of your financial facade begin to form.