Lifestyle Inflation is the greatest inhibitor to creating wealth. Last week, I discussed how debt is the biggest lifestyle mistake. Today, we are going to talk about how lifestyle inflation creeps into our decisions without our knowledge.
Two of the major purchases that we make in our life is the purchase of a home and a purchase of a car. Our credit score and our debt to income ratio are critical in getting the best interest rate for our purchase.
Additionally, there is the decision when making those purchases of how long will I make payments? It seems simple, yet the longer the payment the more you are paying someone else and making them rich. Take a moment and go back to last week’s blog and see the example of how to cut down the interest you are paying someone else.
If you are careful about your length of payment decision, the next conversation you need to have with yourself to eliminate Lifestyle Inflation is “What is the Total Cost of Ownership”.
When you are purchasing a home or a car you need to go beyond the monthly payment. You need to look at all the cost of ownership.
Cost of Home Ownership
A home is the biggest investment you’ll ever make — and before you begin house hunting, you need to understand exactly how much house you can afford. After all, unlike renting, homeownership comes with additional costs beyond the down payment and monthly mortgage bill.
Those costs include electricity, gas, property taxes, water and trash, and homeowner’s insurance. Most think of those, yet the biggest cost with a house that is overlooked is the cost of maintenance.
Maintenance doesn’t come in a monthly bill. It shows up often unannounced and results in major expenses. For example, a couple years ago at Thanksgiving, the kitchen sink began draining slowly. With some drain cleaner it survived through Thanksgiving yet by Sunday we needed to have a professional diagnose the problem. The result was to find that a one-foot section of our pipe was missing underneath the slab foundation. That was a $3,800 repair that was totally unexpected.
How do you prepare for this? Calculate monthly repair costs by taking 1 percent of your home’s value and dividing it by 12. Major repairs, such as replacing the roof or painting the home’s exterior, may occur infrequently — but they can command many months’ worth of repair budgets.
Cost of Car Ownership
We can skip the debate about buying new versus used. Either purchase goes beyond the cost of the monthly payment.
For car ownership, you need to consider the cost of the car depreciation, taxes, financing cost, fuel, insurance, maintenance, and repairs. You are probably thinking about how will I calculate all of this? Edmund.com provides a total cost of ownership calculator that will help you in your decision. TRUE COST TO OWN®
Working with a client this week on this exact question we discovered how Lifestyle Inflation can creep into our purchasing decisions.
Our client was looking about replacing a car and had decided to purchase a car that was a 2016 model. The choice was between two cars that both would fit the requirements of work and life.
Both cars were approximately the same price which eliminated price as a decision. However, when you used the Total Cost to Own calculator it was shocking to see that one car was going to cost approximately $20,000 more over a five-year period to own.
That is Lifestyle Inflation.
Rather than spending the extra $20,000 on a car, use the $20,000 to pay down your mortgage. Stop making other people rich.
If you want to set up a time to discuss how to eliminate Lifestyle Inflation from your financial plan, please go to our online calendar to set up an appointment.
Michael Tannery CPA, CDFA® AIF®
Registered Principal
Tannery & Company
Tax – Accounting – Wealth Management
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