June 2007

• Job Hunting Advice by Mapgirl @ Mapgirl’s Fiscal Challenge. Four practical tips from Mapgirl on job hunting; here is something from the post worth repeating a 1000 times:

DO NOT LIE on your resume. It’s a very ugly thing to do.

• Big Dreams, Small Income: Financial Planning Without A Large Salary by Trent @ The Simple Dollar. Trent answers a distressed reader’s question on how to achieve your goals on a modest income.

• What are you really saving for? by Tehnyit @ Cheap as Chips. Here is some food for thought. What’s your motivation behind saving your money?

• Top Common Fights Over Money And What You Can Do To Avoid Them by SVB @ The Digerati Life. Deriving inspiration from some of her personal experiences, SVB addresses the issue of money fights between couples.

• Online Interest Checking Plus Savings Accounts: Who Offers the Best Deal? by Sun @ the Sun’s Financial Diary. An exhaustive post comparing features of different bank accounts.

• Teaching Money Management: Expendable Cash Index by Broknowrchlatr @ Broke Now, Rich Later. This post is a bit involved, so take your time to read it. The author explains how he plans to teach his two kids about expendable cash index and financial security.

• Maybe We Spend Too Much Time Saving Money by David @ Money Ning. Some introspection by David on whether it’s worth spending a lot of time thinking about money and money-related activities.

• Raising Boys vs Girls? A systematic approach to deciding the easiest by J2R @ Journey to Retirement. An *engineering* approach to figure out if boys are easier to raise that girls. Don’t miss the chart in this one.

• You Don’t Need College To Succeed by Jim @ Blueprint for Financial Prosperity. Another devil’s advocate post by Jim. That’s right, you don’t need college to succeed - a fine blend of discipline and strong will should work just as well. There is one thing that college gives you (ideally) that may be hard to come otherwise - opportunities.

• Fixed-rate Mortgage Payments, Inflation, and Investing by MBH @ Mighty Bargain Hunter. MBH highlights a few points to consider before you decide to prepay (or not to prepay) that mortgage.

• The Carnival of Personal Finance - Greatest Hits Edition hosted by JD @ Get Rick Slowly. Check out this awesome 2nd anniversary edition featuring my post about financial communication between couples/family members.

Other carnivals worth a mention:

• Carnival of Observations on Life
• Cavalcade of Risk
• Festival of Frugality #79
• The Personal Development Carnival

Here is a blue postcard that I received sometime back (click on the image to enlarge it):

And it came from this “Awards Verification Center” address:

Obviously, all the big words - “NEW MERCEDES, BMW, PORSCHE or $40,000 CASH” are sure indicators of a scam. But generally stupid scammers, who promise big rewards, choose email as their preferred way of communicating to me that some Nigerian prince wants to give me $10,000,000 for free (I mean, in return for my bank account information). This postcard however, is the first piece of *scam* that I have received through regular email.

To find out about who these generous scammers are, I checked up the address on Better Business Bureau (BBB) and it turned up three entries on Silverleaf Resorts - a timeshare company. Here is what BBB says under “customer experience” for this company:

Based on BBB files, this company has a satisfactory record with the Bureau. A satisfactory record means a company has been in business for at least 12 months, and properly addressed matters referred by the Bureau. The company does not have an unusual volume of complaints, or any government actions involving its marketplace conduct. The Bureau understands and has no concerns about the company’s products, services and type of business.

OK, so what I first thought was a *scam* actually has a *satisfactory* rating at BBB ! So basically, it’s not a scam - it’s an authentic timeshare company indulging in some “scam-like” behavior (?!) (I am assuming that real scams wouldn’t care about solving customer complaints to get a satisfactory rating). On a related note, I have heard that most timeshare companies show similar traits on the issue of misleading marketing, and in that sense all of them are tending towards scams, but let me not crowd too many topics in one post - feel free to discuss this in the comments.

Fortunately, for the company under discussion, there are some negatives mentioned on the BBB website - without which it would have been impossible to understand the veracity (or rather, the lack of it) of the shady promotional postcard.

Our file experience shows that this company has been the subject of complaints alleging misleading or high pressure selling tactics or dissatisfaction with the free award received at sales presentations.

And later it says:

If you have received an award letter from this company, it does not mean that you have won a contest. You will receive a free gift if you attend the sales presentation, but the chances that you will receive a major prize such as a car or cash are very slim. Most consumers receive the ten one-day holiday package, which allows use of resort facilities during the daytime only. Overnight accommodations and transportation are not included.

However, I am still having trouble understanding how a company with some definitely false claims (I don’t think they have ever given anyone $40,000 cash or Mercedes or a BMW X5) makes a “satisfactory” rating in BBB. A satisfactory rating reflects the fact that a reasonable number of complaints lodged against the company have been resolved (as seen in the BBB report). May be I should try and lodge a complaint against them on BBB under advertising issues, and see what *reasonable offer* the timeshare company sends my way to settle the issue - with so many complaints resolved, I am sure it must be something convincing - or should I say… lucrative.

Fun fact: Not all timeshare companies are scams. Here is some detailed information about how timeshare companies operate and how the to identify the ones that are scams - in that, don’t miss this entertaining part “There have been reported cases in which a free boat that was offered as a prize turned out to be a toy boat.

I wonder if the blue post card was talking about toy Mercedes M-class and BMW X5 cars… I like free diecast vehicles.

This is a list of day-to-day activities (that we engage in at present times or did in the past) that manifest some aspects of frugality in our lives - nothing too extraordinarily profound, but interesting nevertheless. The list is presented in no particular order for no particular reason. Wherever possible, I have included links to resources, recommendations, or additional reading material, feel free to explore these links at your leisure (there are no referral links). In the text below, the term “we” will usually mean me and/or my wife.

1. We use thrift shops (Dollar General, Family Dollar, etc.) for general purpose household items (non-essential odds and ends). Stuff like brushes, brooms, containers, etc. However, we avoid buying food stuff at these stores – just don’t feel comfortable enough. A quick tip here - certain items like cutlery and dishware are usually cheaper at Walmart than at these stores, so don’t just shop blindly at thrift shops.
2. We drive a 10 year old used car and try to maintain it regularly (as much as possible). It does gives us problems, and generally costs a lot for repairs, but we have figured out that it’s more economical (for now) to keep this junker than to buy a newer (better) car.
3. We change oil every 4000 miles (or 4 months) instead of the dealer recommended 3000 miles (or 3 months). Also, bought ourselves a prepaid oil change card - it’s sort of buying oil change in bulk; got us a 25% discount over individually paid oil changes. Also, the prepaid card is for 10 oil changes - that’s enough to last us for about 3 years; probably even protects us against inflation. My dream is to do my own oil changes in future, but I am not there yet - and I am not sure if that is going to work out well. By the way, here is an nice article recently published by a fellow blogger on the topic of oil change, make sure you go through it sometime.
4. Instead of pesticide sprays for roaches, we use boric acid – one pound of boric acid costs about $2 and works much better than most other expensive chemicals. Now-a-days the roaches are gone (except the occasional visitor from outside) and I think that’s because of a combination of boric acid and a clean sink. Come to think of it, a clean sink and a clutter free home are free ways of getting rid of roaches - that’s cheaper than boric acid.
5. I wear some clothes like this one in the photograph:

   

   It’s a picture of my favorite piece of clothing - a 4+ year old blue jeans from Walmart. This is in accordance with the 2^nd rule of graduate school - No one cares about what you wear (the first rule is - It’s OK to procrastinate). Anyways, I think I have the capacity to keep wearing this pair of jeans for some more months (may another year) before I start feeling embarrassed about it’s condition. Probably, my wife will be embarrassed to walk with me sooner than that. Note that this is just an example; not all my clothes are in this condition, although quite a few of them are older than 5 years.

6. We generally buy clothes only if there is some kind of a discount sale (some stores like JC Penny and Goodies have a *sale* everyday and I am not talking of such stupid sales). I should mention here that I have a mental block against buying used clothes - I just won’t be able to wear them.
7. We rent a small apartment (small = relative small as compared to what other married couples generally prefer). Earlier, I have mentioned on this blog that we spend about 11% of our gross monthly income on apartment rent+utilities.
8. When I was single, I always had roommates to share my rent with. Typically, 3 (sometimes 4) of us used to share a 2-bedroom apartment. Looking back, I think I saved a bunch of money by living like that during my early days as a graduate student.
9. Around that time (when I was single), I slept on a $8 sleeping bag for about 1.5 years. Laugh (or shudder in disbelief) if you want, but that’s true - a bed was just too expensive for me. OK, may beds weren’t that expensive, but I was pretty comfortable on a sleeping bag, so the thought of a bed didn’t really come out as a priority at the time.
10. We don’t have cable. Why? I don’t think we have enough time to watch what an average cable connection offers here. Plus, we are not *attached* to any particular television program or series. We get crystal clear reception for a number of popular programs (Raymond, Simpsons, Friends, House, etc.) using a $9 antenna from Walmart.
11. We used to pick up furniture from the dumpster - we don’t do it anymore because now we have everything we wanted. But there was a time when we used to drive around major dumpsters around our area to look for stuff that we could use…these dumpster-drives were strictly restricted to furniture. We haven’t tried it yet, but you can get some great free stuff through the Freecycle Network.
12. We use wholesale warehouses (mostly SAM’s Club) for certain items that can be bought in bulk. Our consistent warehouse choices have been: milk (yeah it’s cheaper there), sugar, rice, tissues, chocolates, chicken, kitchen towels, juices, and a few more that I don’t readily recollect. Considering the amount of stuff we buy from there, I am sure the membership fee pays for itself in about 4~6 months.
13. We use compact fluorescent (CF) lights only in our home. CF lights save money and I personally like the white light (I am aware that some people don’t like it too much). We use a combination of those spiral CF bulbs and those long fluorescent shoplights.
14. We use the school library for most of our books (thanks to a very well-equipped library on campus). However, occasionally, there are certain books that we *need* to buy; for buying books we usually first compare prices online (I am a bit partial to this nifty website for book price comparison: AddAll.com) and at times, we also check our local Half Price Books store. By the way, especially for graduate students, professors are good sources of expensive academic books - they are generally hesitant in lending books to undergraduates, but for grads they won’t mind - all you got to do is ask.
15. We regularly use “The New Release” DVD kiosks that give us latest movies for $1 (+ tax). The downside is that the movies that we *want* to watch are not always available (and sometimes there are long queues at these kiosks) - in such situations we head over to the local Hastings, get our movies and return them the next day to get some credit (like a $1 discount on the next rental). Earlier, I have written a post about how you can rent movies for cheap; check it out and see if you have some of those options near you. Using our school video library is the most frugal thing to do, but unfortunately, our school does not allow us to take the movies home (which I think is dumb) - you got to watch it in the library.
16. We always apply for available assistantships and/or scholarships to fund our graduate studies (both me and my wife). Throughout our graduate education, we have been funded through some kind of an assistantship position (teaching or research) and that has helped to pay a major chunk of our tuition and fees in addition to providing a nominal stipend. Plus, there are occasional additional scholarship opportunities that we avail. Life would have been tough without these financial supplements.
17. We carry homemade lunches to work. Usually, these are leftovers from the previous night. Sometimes, it’s just an apple or a banana. It’s probably been many months since we last ate outside for lunch. It’s not like we don’t eat outside at all - there are those occasional nice dinners at nice restaurants - but those are few and far between.
18. We usually get our groceries at a local farm market - fresh produce is often cheaper (and fresher) here than at Walmart. A nearby Walmart Supercenter serves as a backup. Check out if you have a local farm market in your area through this website.
19. For vacations, we usually try to locate some good friends near our destinations who would be willing to host us - it saves a bunch of money on hotels. Most of you probably remember a few of my recent posts about our trip to Philadelphia/New York - we were hosted by our close friends during the visit. There are some disadvantages to being hosted by friends, but let’s not talk about it here.
20. We book our airline tickets early and do a lot of comparison shopping before finalizing the tickets. I usually first visit Kayak.com (after some people recommended it to me) and then I sort of comb through individual sites to see if something else is available there that Kayak is missing. Strangely, most of the times we have had better deals when we booked directly through airline websites, instead of such portals. Btw, did you know that Cheaptickets and Orbitz are different brand names of the same parent company: Travelport.com? And that Expedia and Hotwire are different brand names of Expedia Inc.? Even with these relations existing between websites, you need to check them individually - although, Cheaptickets and Hotwire are generally cheaper than Orbitz and Expedia respectively, the options are not always matching. Apart from these options, I would recommend checking with Southwest Airlines for cheap tickets after my recent experience with them.
21. I walk to school/work everyday - no car means no parking permits and that means a bunch of money saved. Here are some detailed reasons on why I walk to school. Also, after a couple of my bicycles were stolen, I have given up on that mode of transport; so I can also say we are saving money by not buying bicycles (which would eventually be stolen).

    

    Yeah, it’s the same pair of jeans I showed above in #5

22. We don’t carry balances on our credit cards (well except 0% APR balance transfers). I was once foolish and did burn my hands with them; however, things have changed for the better over time and now I completely pay them off by the end of every month. It’s been more than a year since we last paid finance charges on any of them - in future, I don’t think we will be paying interest on our cards - ever.
23. For minor car repairs, I have bought a “Haynes Repair Manual“. Stuff like replacing headlights, battery, etc., becomes a piece of cake with the manual. A couple of times, I have also been able to dismantle a part of my dashboard (and some area underneath it), to reach a noisy air conditioning fan and discovered some dry leaves which were causing a huge racket (if I remember correctly, a local shop quoted about $100 for the job). However, if you are not confident enough, I would recommend not messing with your car. Always remember this - if you open a can of worms, it takes a bigger can to put them back inside.
24. We dilute our dishwashing liquid. We first mix a little bit of our dish washing liquid with water in a separate bowl, and then use the diluted solution for washing dishes. This is an after-marriage change suggested by my wife - before that, we idiots (me and my roommates) used to drop blobs of dish washing gel on plates in order to wash them. I don’t think diluting the liquid is a huge way of saving money, but it’s a pretty frugal way to use dish washing gel. On a stingier side, I am also in the habit of extracting the last drop of shampoo from almost-empty shampoo bottles by filling some water in them - doesn’t save diddly-squat of money, but it’s a fun thing to do.
25. We use our student identity cards almost everywhere to get discounts on almost everything - restaurants, movie theaters, malls, and a lot more. It’s one of those little perks of living in a small university town. Lowest discounts are about 10% and good ones are up to 25% at certain places.

There are a lot more frugal things we do, but they are probably not worth writing and reading about.

Before you start getting some unreasonable ideas about our lifestyle, I need to make it clear that we are far away from being an epitome for frugality. If I start compiling a list of “un-frugal” things I/we have done, it would probably beat this list of frugal things by miles.

If you have a some peculiar things/features to share regarding your frugal way of life, feel free to leave a comment.

Let me tell the story in two parts. Part-1 goes like this: a couple of years ago, me, my boss, and a fellow graduate student (who is still single) were having lunch and discussing the general philosophy of life (or that kind of stuff) in between bites. Somehow, the topic veered towards how people buy homes. Here are a few lines from the conversation:

Me: Any advice about choosing a good house?

Dr. P (my boss): Simple, a good house is the one which your wife likes. Believe me, let her choose the house and you will be happy as long as you keep it. If it takes more money to buy the one she likes - spend it and you will never regret it. If you don’t, a few years down the line you are surely going to regret it and probably will keep hearing about it for a long time to come.

Fellow Graduate Student: [starts chuckling] Really? [keeps chuckling]

Dr. P (to the student): It’s not funny - you will realize it when the time comes.

Part-2 - fast forward to yesterday: while coming back from a trip to a local grocery store, we took a detour to admire some nice houses located in a nice area in town (it’s sort of our 15 minute hobby when we have nothing else to do). Here is a part of the conversation that took place during the drive.

Wife: [pointing to a beautiful large house] I don’t like that one.

Me: Why, what’s wrong with that?

Wife: I think that looks scary. All big houses are scary. Plus, I don’t think we will have time to clean a house that big - we barely manage to clean our small apartment. I would be much happier in a small but cozy house - even slightly bigger than our apartment is fine.

Me: Really? [trying to get a confirmation]

Wife: Yeah… see that one over there [pointing to a much smaller house] - we should get something like that.

I have said enough; my astute readers can now put two and two together and see why a lot of my future troubles are solved.

I am thinking at least a hundred thousand dollars here, to start with.

Here are links to some interesting money articles from the week.

• 10 Tips For Dealing With Car Salesmen to Make Sure You Don’t Get Hosed by Jeremy @ Generation X Finance. Some very useful practical tips for dealing with car salesmen. I have something to add here. If you really want to avoid the psychological pressure from a car salesman, confront him online - seal your deal through emails and then just go and pick up your car. I will have more to write about this in future.

• Is Retiring by Age Forty This Simple? @ MBH @ Mighty Bargain Hunter. MBH analyzes the assumptions made by a “retire at 40″ article. He makes some valid points on certain assumptions that most personal finance bloggers make when they try to portray an overly positive financial picture to someone. Read the original article and tell us if you think you would be ready to retire early by following those steps - at 40 yrs?..may at 50 yrs?

• Ten Ways To Handle That Problem Property Next Door by SVB @ The Digerati Life. Sometimes that rundown house next door can reduce the value of your nice mansion. SVB gives tips on how to avoid getting trapped in such a situation.

• How Movie Theaters Make Money by Nickel @ Five Cent Nickel. I know how they make money - by selling popcorn and soft drinks at a premium. Ok, now read Nickel’s article to find out how they really make money.

• Did I Misread Discover Miles Card’s Promotion? by Sun @ The Sun’s Financial Diary. Sun goes “Oops!” - admits to misreading a credit card offer and wishes he had those 12000 free miles. Blame it on sneaky marketing? Nopes… marketing is always sneaking (credit cards or not), the consumers have to make sure they don’t fall for it.

• Who Actually Reads the Terms & Conditions? by Ben @ Money Smart Life. This follows nicely with reference to Sun’s post above. You don’t need to read every word in the terms of conditions statement, but you should know what to read - Ben gives some pointers towards that.

• Donating Stocks to Charity by Jim @ Blueprint for Financial Prosperity. Jim discusses the monetary advantages of donating stocks to charity. Hmm… it’s better than donating cash.

• Umbrella Insurance by Matt @ Binary Dollar. A few words of wisdom about umbrella insurance.

• Top Athletes Make a Boatload of Money by FMF @ Free Money Finance. Tiger Woods makes $112 million a year and Roger Federer makes $31 million. Check out the post for other interesting numbers.

• I Am a Monkey by Lazy @ Lazy Man and Money. From the title it seems like Lazy made a transcendental connection with his ancestors; but it’s really about lending money on Prosper. He is replying to an allegation: “Prosper lenders are monkeys”.

I managed to keep this topic off my blog for long, ignored all the drama, shrugged off stuff like this in disbelief, spun off several conspiracy theories, and generally just let an idiot be an idiot (here, idiot in question = Casey Serin). But yesterday, through a series of links, I finally landed on his blog and wasn’t very happy to read some of the stuff and just had to get this rant out of the way.

More than unhappiness, I think what I felt was sheer frustration (perhaps jealousy too). It’s not anger, or hatred (I would have been angry and hated him if he had sent me emails - like he sent to Ramit @ I Will Teach You to be Rich) … it’s just some frustration on how Casey’s idiotic approach to getting rich quick has propelled him to almost a celebrity status, in spite of his large scale financial failure.

Now, he has it all - publicity (albeit negative - it’s ultimately going to work in his favor in the long run), main stream media attention, mentions in numerous major magazines and newspapers, an alleged book deal, outrageous internet traffic to his blog (300,000 hits a month), and now generous advertisers to give him more money to spend.

And what did he have to do for all this? Acquire real estate by fraud, and later just throw up his hands and say “Oops! I made some mistakes, I can’t pay you guys anymore… do what you want”, and then preach his get rich quick strategy to other people through his blog (and, in future, possibly through his book).

There is something else that I didn’t like. Read this excerpt from a letter sent to him by a debt collector:

“Washington Mutual has authorized our office to offer a settlement on the above-referenced account for less that the full balance due. To settle this debt, Washington Mutual will accept $4884.08 which represents 70% of your current balance. To take advantage of this offer, send the full amount of $4884.08.

As of the date of this letter, you owe $6,977.25.”

In the context of this letter, Casey writes:

“Is that the best they can do? I’m guessing it’s 8-9 months late at this point.”

So, after you commit frauds and spend money like crazy, you get a discount on the amount you owe? - plus, you think they should be giving you more discount? That’s awesome. Earlier, I used to think about such things as *irresponsible*, but thanks to Casey’s *success*, terms like fraud, irresponsibility, arrogance, etc., now have a new meaning to them. I don’t think I have an instrument capable of measuring the almost infinite thickness of Casey’s skin. For some people, he is is “high stress tolerant” — for me he is just thick-skinned.

On a related note, I wonder if Washington Mutual would give a 30% discount on defaulted student loans to students who are in genuine financial trouble.

Also, with the book deal rumors out, I don’t understand why creditors are giving him discounts on amounts owed at this point of time — why not wait for him to make money from his book deal and then extract every penny he owes (before he spends it on some other monkey business and declares himself bankrupt again)?

Anyways, in time to come, I think Casey could write a good book titled “How to be a Rich and Successful Village Idiot“. I will give him that. He may continue being the village idiot, but our general mass tendency to idolize such people will eventually make him rich.

Sometimes, I like to think that this whole I-am-facing-foreclosure mess was orchestrated right from the beginning (just because I can’t digest the real stuff — it’s just incredible). Probably, real estate was never in Casey’s get rich scheme — insane publicity was.

Btw, I don’t buy the “at least he is brave enough to talk openly about his failure” - I think he is doing that just because, in his current position, there is nothing else he can do.

Apart from the links in the write-up above, here is another article (by JD @ Get Rich Slowly) that discusses Casey’s attitude towards getting rich.

Bonus: This link will take you to a page on Casey’s website where you can read some funny testimonials by his advertisers. The last time any testimonials made me laugh was in this ad.

Instead of regular (heavy) money links, I was on a look out for some interesting stuff today - and fortunately found some.

First, an exception to the “interesting stories” - this blogger dude recommends drinking water instead of carbonated drinks. Head over and say hello. Hint: check the “About” link at the top of that page.

Now, back to the stories.

• Super Saver @ My Wealth Builder mentions about average salaried Japanese saving 27.5% of their income! He theorizes why the Japanese tend to save a lot, and shares a small story about 102 years old Japanese twins. Any ideas why people in certain countries might be saving more than people in other countries? Probably cultural difference matter a lot when it comes to how you view your money. I wonder if the Japanese people, who are now living in the US, subscribe to the same savings philosophy as followed by those living in mainland Japan.

• JLP @ All Financial Matters writes about a small incident in which he snubbed (for good) someone who littered (rather, encouraged littering) in front of him. Based on his story, some astute folks can easily figure out the state where JLP lives - hint: Don’t Mess With Texas.

• Flexo @ Consumerism Commentary laments about how he can’t stop spending on food. Talk about peer pressure for eating outside. If you have some motivational advice for people who can’t stop eating outside, please feel free to share it with us. My motivational piece of advice is here…(crap..did I say motivational?)

• Sharon @ The Frugal Duchess learned some lessons after being trapped in a fire incident in her apartment building. Apart from the valuable lessons, this is the first time I have heard of a microwave blowing up. I should probably stop staring at the objects that rotate on our microwave’s turntable - damn that little light in the microwave, that’s the only thing that makes me want to peer inside.

• SVB @ The Digerati Life gets 10 used chairs in *great condition* for $400 on Craiglist. I left a comment that must have unsettled her for a while - we got our brand-new dining set (table + 4 chairs) in $99. ..it’s small enough to fit in our small apartment. Btw, if you are on Freecycle you don’t even need $99… you could just get it for free.

Now, before I end this post, here is a not-very-amusing story about a family in Morocco who lived in a toilet for several years.

“When my son went to school, the other children would tease him and call him ‘the boy from the toilet”.

That’s tough life.

A reader (Amy) left a comment on the latest hot topic of discussion on this blog “What have you got against credit cards ?“:

I totally agree about credit cards. They are trouble. I got rid of mine and am working my way towards debt freedom. My goal is to pay off $72,900 worth of debt by April 2009.

Now, I appreciate anyone who is determined to pay off his/her debt and is working on a plan, but what strikes me is the amount of the debt… probably because I have never known anyone with so much debt.

I will almost have to buy a house (or a BMW 7 series) with a credit card to have that monkey on my back…(or perhaps a great medical disaster at a time when I am not on insurance might do it).

I tried to fish around the Amy’s blog to figure out the source of this massive debt, but no such luck. The blog talks about a debt-free goal, but doesn’t say where the debt came from. Amy’s comment seem to imply that it came from credit cards (?). If that’s the case, then she should probably take interest charges into account before setting a goal and make sure that it doesn’t sound unreasonable after some time. Apart from that, assuming that there are no interest charges on her debt, and assuming that Amy started on this path beginning May 2007, it gives her only 24 months to cover that amount - this comes out to $3037.50 per month! - that’s a tall order at any income level.

Amy, if you are reading this, we would all like to know how you managed to get into that much debt? Is it all due to credit cards or some other factors (student loans, etc.) are involved?

Others, have you heard of (or personally experienced) any such massive debts (other than mortgages)? No, I am not talking of those stories on CNN Money, or MSN Money Central - I am talking about people around you in real life. The most debt on credit cards that I have heard in my friends’ circle was about $12,000 ~ fortunately, the dude successfully paid it off within a year.

Amy didn’t ask for advice or anything, but if you were to give some words of wisdom to her, what would you have to say?

The idea for this post came after observing my brother graduate out of school, and his efforts to “upgrade” his lifestyle according to what he deemed “proper” for a professional engineer working in multi-billion dollar firm. I shouldn’t really single out my brother because 99% of the students I know have gone on a similar path - it’s just that I wasn’t close enough to them to be able to observe their attitudes over an extended time frame. Anyways, coming back to lifestyle inflation, I think it probably starts gaining strength when you experience a “significant” event in your life - like graduating out of school and getting on a job, making a large ticket item purchase (house, car, etc.), marriage (may be even engagement), getting a raise, etc.

To make this a bit clearer, in the following, I will resort to some crude graphs along with my narration. I will stress here that these are my personal opinions; you may probably have a different story to tell - in which case we would be pleased to hear about it.

First of all, I don’t think lifestyle inflation is something really bad. I consider it to be an essential element of life - as long as it is within reasonable limits. For example, you don’t need to drive a junker all your life - sometime down the line, whenever it’s feasible (affordable and within your means), it’s OK to upgrade to a reasonably better car and save yourself some headache. It’s OK to wear better clothes, it’s OK to wish for a bigger apartment, a better computer, and whatever else that you want. But all this is OK as long as you are *reasonable* - mind you, the word is highly subjective and individual perceptions will most definitely differ from each other. What I mean by reasonable is this:

It’s a graph of rate of earning/spending ($ per day or $ per month, etc.) vs. time (months, or years, etc.). With reference to the graph above, as long as your rate of spending is less than your rate of earning, your lifestyle inflation is totally normal.

Problems arise when your lifestyle inflation exceeds your income inflation - you start spending at a rate more than the rate at which you are earning. This shown below:

Like I mentioned in the opening paragraph, my observation is that the maximum danger from out-of-control inflation arises when you go through some significant events in life and decide to reward yourself for your accomplishments (or celebrate a milestone, etc.). To understand this, first let us assume some “normal lifestyle inflation” - something that’s within reasonable limits:

Now, let’s show some significant events (”moments of excitement”) on the time line, and see what happens to your rate of spending:

Most people tend to spend at an increased rate during events like marriage, buying a house, a car, etc. This is perfectly understandable. However, what happens is, long after the event is over, people don’t tend to come back to their “normal” state. Why? Honestly, I don’t really know; probably they get used to the higher rate of spending and there is some sort of a financial inertia that doesn’t allow them to come back to their normal rate of spending. It is around such events that you should be really careful - this is the time lifestyle inflation will first start nibbling at your pockets.

What you ideally want is this:

You can spend at a higher rate during the significant events, but after that you need to put in considerable efforts to bring your lifestyle back to normal spending levels. I understand it’s always easier said than done - but that is what needs to be done - and it would take a lot of self-control and determination to achieve that.

Have you observed something like this? Or perhaps something else about lifestyle inflation?

Before you go, here are some articles from other bloggers about lifestyle inflation:

• Trying To Avoid Lifestyle Inflation by Jonathan @ My Money Blog.

• Tasting Up by Wanda - featured earlier on this blog as a guest article.