The knee jerk reaction of most people when they get a pay increase or a windfall of money is to spend it. Many of my friends and classmates when we got out of graduate school went from making $0 to over $100,000+ in just a few months. The excitement of getting their first high-paying job led many of them to spend exuberantly. They purchased fancy cars, went on shopping sprees, moved into a new luxury apartment with all the amenities. They thought, we’ve done it! We’ve reached the promised land. Then reality set in. First was finding out how much we pay in taxes. Then it was the student loan payments that kicked in after being deferred. Most of us soon realized we weren’t making nearly as much as we thought we would. But by then it was too difficult to downgrade their lifestyle. They already signed the lease on the luxury apartment, took out a loan for their new shiny BMW or Mercedes and the return window on their $2000 Louis Vuitton purse had expired.
I’m not proposing we never splurge (a little), but what I am saying is upgrade your lifestyle with extreme caution. Because once you go up, it is hard to go back down. It’s easy for people to upgrade their lifestyle, but its really hard to downgrade it. Think about your current living situation or the car your drive. Would you want to move to a smaller apartment/house or switch to an older model car? Probably not. Most of us are trained to want the newer, shinier something. We want to move on up, not down.
One of my biggest financial regrets is not living a little more frugal and a little less entitled when I was younger, especially in my late teens and early 20’s when it was more tolerable, acceptable and dare I say almost fun to live like a student (i.e. very frugally). After all, I was a student with a negative income. It’s one thing to have like 6 roommates in a 2 bedroom apartment (true story) when your in your 20’s and quite another in your 30’s. It’s somewhat funny to sneak out food and utensils from the dining hall to save on dining costs when you’re a college student, quite another to be doing things like that when you’re in your 30’s working. I remember a guy I once knew, an engineer who worked for a big company like Boeing or Cisco. He bought a beautiful house he could barely afford. He would steal drinks, cups, toilet paper, etc. from his work to stock his home. Really? Is that how you want to live? In retrospect, I could’ve taken significantly less student loans if I had been willing to budget more tightly. Then I would’ve incurred less debt (remember I came out with $130,000+ in student loan debt), which would’ve allowed me to save more and invest earlier allowing time and compound interest to be on my side. My husband and I would be in an even better financial situation thus allowing us to spend a little more freely now and in the future. As you get older, there are always more and more things to spend your money on, especially once you have kids, so why not save aggressively when your young? I know, would’ve, could’ve, should’ve. So I share my regret with you younger readers who might be in college or in your 20’s thinking about taking out the maximum student loans and maybe even applying for personal loans to cover their graduate school costs and lifestyle, and I want to advise you, live like a student (a frugal one) for as long as possible. Take on less debt and save aggressively. You’re slightly older self will thank you.
For those of us who are a bit older, I say again upgrade your lifestyle with extreme caution. Thinking about buying a new car or a house? Really try hard not to jump from a 1995 Honda Accord to the latest Mercedes S-Class model. If you’re currently living in a 1750 sq ft, 3 bedroom townhome that cost you $400,000 (Southern California home prices), think long and hard before you decide to become house poor by purchasing a $800,000, 2500+ sq ft, 5 bedroom single family home. Recently, my friend lamented to me how burned out she felt, juggling working full time with raising 2 young kids and living paycheck to paycheck, even though her husband and her make a good income of around $320,000. How did this happen to her? Well, one might be that she lives in San Francisco. But two is that they purchased a house that they can barely afford. So before you lament you need more space for the kids, or that you deserve it, take a hard look at your finances and your future financial goals before you move on up in your lifestyle. Most of us will not find happiness in driving a fancy car or living in a bigger home, especially if you’re living almost paycheck to paycheck and especially not when you hit retirement and realize you might have to sponge of your own kids.