The Trap! – Lifestyle Inflation

“The Trap!” As I call it in my last blog, is a serious socioeconomic problem prevalent in most developed countries—especially in the US. The ‘Financial Trap’ is the continuous cycle in which one’s spending increases at the same rate as one’s income, limiting the ability to accumulate any sort of meaningful wealth.  In order to get out of this trap, one must first ask themselves what they truly want in life. They really need to be able to ask themself what kind of life they want to live (this is a common theme on the financial independence podcast “Radical Personal Finance”, which is available for free on Spotify).

If you want to own the largest house or condo in the nicest neighborhood you can afford, to have all the latest toys, to have a vacation once a year, and to own multiple cars, all while having to work a 9 to 5 career that you may or may not like, to have loans that force you to continue working, to have minimal savings or investments, and to depend on your 401k and social security to guarantee basic needs in the golden years, then I recommend that stop you reading my post right now.

However, if you want to be in a position where you are financially independent and can even position your children to be financially independent, then it is important for you to recognize that the standard lifestyle of working to earn, earning to buy, and buying to be happy does not bring true happiness or fulfillment in our lives. People find true happiness in the strength of the relationships in their lives and how meaningful their work is to them.

Typically, most people that are stuck in the financial trap don’t realize they are in it as it is weaved into the very fabric of American society, as well as other debt-driven societies. The costs of the basic necessities in life are increasing to a point where the average American has to go into ridiculous amounts of debt just to be able to afford things like education, a house, and healthcare.

The average tuition of a 4-year bachelor’s degree can cost anywhere from $80,000-$180,000 (including room and board, see below). These enormous costs have students leaving college with an average of $30,000 in debt by the time they graduate, as stated from a study from CNNMoney (link). The percentage of students who borrow money has increased from less than 50% in 1993 to 68% in 2016. This necessity of college combined with the increasing costs of tuition really anchors our financial mindset to a state where we are comfortable committing our future dollars for immediate benefits, namely our education.

Average fees at US universities, 2016-17
Public four-year colleges (in-state fees) Public four-year colleges (out-of-state fees) Private non-profit four-year colleges
Tuition and other fees $9,650 $24,930 $33,480
Room and board $10,440 $10,440 $11,890
Total (per year) $20,090 $35,370 $45,370

table link

Let’s be clear, I am not trying to promote or denounce college education as a whole. I believe education is important and I definitely benefited from my college education. My point is that college is really one of the first times that most people in society commit a huge sum of money at a very early age, without really thinking about the value of the dollar they are spending.

With all these dollars spent on public and private education, you would think that someone would’ve taught you how to file your tax returns, or how to calculate how much interest you would be paying on your college loan. Financial literacy is not something that is taught to Americans as a whole in the schooling system.

Most of us are taught how to be good workers for other people and how we should be grateful to have the chance to work for someone else. We should be happy with the 40-hour work week, the 2 weeks a year we can go on vacation, and the ability to buy things that temporarily make us forget that we are stuck in the “rat race”. We have been brainwashed into buying tiny stones that cost tens of thousands of dollars, giant homes that are large enough to store all the toys we buy, and the latest tech when the previous year’s model would provide many, if not all, of the same functions.

It is important to recognize the difference between a necessity and a want in your own specific life, and to be able to resist purchasing things that you only want, but do not need. We have been taught to buy things we want because we ‘deserve it’ or can ‘afford it’, which in the long run ends up having the majority of the population in a position of debt or insignificant wealth. If you are able to limit your purchases to items of need, then you will be a in a position where you will have excess money to save or invest. Even if this surplus of money is small in nominal value, with the magic of compound interest, you will be surprised by how much a single dollar can grow in the long-term.

What Can You or I Do?

I strongly urge all my readers to think and reconsider the purchases you are making before committing your hard-earned dollars. The purchase can be as small as a Sunday brunch or as large as a 5-bedroom home. Ask yourself, ‘Do I really need this? And is there any way I can obtain the same value by spending less?’ Do you really need to eat the breakfast platter at the cafe around the corner? Or could you spend a few bucks making avocado toast at home and be just as happy? Do you really need to live in the most convenient and most expensive neighborhood you can afford? Or could you spend far less on housing by living further away from work? No one should ever feel pressured into spending money they don’t have. This includes missing your friend’s dinner invite to ‘Peter Luger’s Steak House’ in Brooklyn, averaging a cost of $85 to $100 per person.

A great first step out of the trap is to start ‘producing instead of consuming’.  This could mean having the ability to cook a great dinner instead of going out and spending money on an extravagant meal.  Everyone has their guilty pleasures that get them through the day, and I am no different.  My guilty pleasures are coffee, iced lattes, and more coffee.

Recently, I purchased the MiniPresso and Drip Coffee on Amazon, and these have already paid for themselves.  Now, I am able to make my own iced latte and coffee whenever I want for pennies on the dollar as compared to purchasing a drink from a local cafe.  This is a small example of how to reduce consumption and spending by producing the thing you want instead of buying it.  A much larger example would be having your own garden, or learning a practical skill like plumbing.  Maintaining a garden or being able to do handy work is not an easy task, but can provide great future pay-offs if you commit to learning the craft.

Below are the coffee items I have bought in order to appease my caffeine monster while staying on a budget! Disclosure: the below images are affiliate links from Amazon.

The MiniPresso! For the espresso lovers

Drip Coffee! For a hassle free coffee!

Basic Coffee Grinder

Brush is optional to get all the beans out of the grinder!

The lifestyle change of making my own coffee has already saved me thousands of dollars. It is small habits like this that can either make you rich or leave you in poverty.  Start taking the proper steps to make small but impactful changes in your life by producing instead of consuming.

The Trap is definitely a hard situation to get out of.  No matter where you are in your life, I promise that Financial Independence can be achieved by simply changing the way you think about money.