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The kind of inflation you can control

The kind of inflation you can control

February 10, 2022
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A friend who sold cars for a living once pointed out a prestigious imported brand and stated that, in general, anybody you saw driving one really couldn't afford it.

His evidence was, of course, anecdotal. But maybe not too far off. People like paying more than they ought to for nice cars.

Edmunds reported that in 2020 70% of car loans were for a period of longer than 5 years, a jump of 29% within the past decade. And at the same time the average monthly car payment had hit an all-time high.1

When you extend the length of your loan and raise your monthly payment on a depreciating asset, chances are you may not actually be able to afford what you're buying.

In a closely related phenomenon, a survey of more than 28,000 adults conducted by LendingClub and PYMNTS found that 54% of Americans are living paycheck to paycheck.2 You might assume that these are people who don't earn enough income to make ends meet. But the report found, "The reality of a paycheck-to-paycheck lifestyle in the United States is more complex, and the current economic environment has made it even more complicated."

Or to put it plainly, this kind of financial insecurity can frequently be caused by personal overspending.

The survey found that one demographic in particular has found themselves in this situation: Millennials (those born between 1980-2000) who make more than $100,000 per year. Within this high-earning contingent fully 60% reported living paycheck to paycheck.

According to financial writer Hillary Hoffower, these affluent people who are spending everything they earn are known as HENRYs—short for "high earner, not rich yet."

She writes, "HENRYs typically fall victim to lifestyle creep, when one increases one's standard of living to match a rise in discretionary income."

It's true that people in this demographic are facing many headwinds when it comes to saving: burdensome student loan debt, soaring housing costs, and the high price of raising children. But Hoffower adds that for the HENRYs, at least, what keeps them living paycheck to paycheck is a preference for a comfortable and often expensive lifestyle.

The adverse effects of the Consumer Price Index inflation rate reaching 7% have been much in the news lately. We can't do much about it. But the steady expansion of personal spending, also called "lifestyle inflation," can be even more detrimental to saving. Fortunately, this is the kind of inflation you can control.

The biggest inhibitor to overspending is simply sticking to a budget. And you don't even have to swear off nice cars, fun vacations, and generous gifts. You simply need to make them categories to plan and save for.

An important second component is enlisting the help of a trusted advisor who can help you capture your income gains for a better chance at a fully funded retirement, and help hold you accountable for progress on reaching your future goals.





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