Who Let That Lifestyle Creep In?

Frankly, we did – guilty as charged. Many of you may already know what Lifestyle Creep is. For those who don’t, it’s when your standard of living keeps pace with (or potentially exceeds) any increase in your household income.

A funny thing happened on our way toward financial independence. After my wife and I finished paying off all of our debt, we did as planned. The extra money no longer going toward debt repayment was put towards savings. And this felt really good! We were able to set our savings rate at around 20-25% of gross income through automation – primarily in our 401(k) plans at work, but also through contributions to a taxable investment account.

However, when we started on our savings journey we were not anywhere near our peak earnings years. We were both earning decent incomes at the time, but they would increase quite a bit as time went on. As those income increases came to fruition, we rationalized our, then undefined by us, lifestyle creep as nothing to be concerned about. We had automated our savings at the steady rate of between 20-25% of gross income. No worries!

This was in the 1990’s well before thinkers like J.D. Roth at Get Rich Slowly, Jacob at Early Retirement Extreme, J.L. Collins The Simple Path to Wealth, Pete aka Mr. Money Mustache, or Brandon the Mad Fientist and their blogs, encouraging much higher savings rates, existed. (I didn’t even know what a blog was back then. I’m not sure any even existed!) When we looked around, no one (at least that we knew of) was saving anywhere near 20-25% of their income. We were the outliers. On the surface, most people weren’t even aware of our ‘aggressive’ savings rate as we were able to keep up with the Joneses given our dual incomes at decent levels. And lifestyle creep quickly crept in.

Who Was Our Lifestyle Creep?

Two major expense categories accounted for a good portion of our lifestyle creep. And, over the years, we have justified, defended and ultimately come to terms with them. They are two American icons – real estate (or the renovation thereof) and cars.

Personally, I have always had an affinity for sports cars, especially German ones and I have owned quite a few of them – not all at one time, though. Mostly, these cars were purchased used, but even so, there is still a good bit of depreciation and maintenance that comes with owning these vehicles. Thankfully, that expensive habit has passed – and although the activities and friends surrounding that passion remind us of some very happy times, we have moved on to other fun and perhaps less costly activities. However, my wife and I both do admit to dreaming about being behind the wheel of an awesome vehicle. Literally, we dream. But that’s as far as it goes.

The second big area of lifestyle creep was real estate. Our biggest real estate ‘investment’ was the purchase of a distressed property. It was massive for our three person family at 5,000 square feet, but it was cheap! We had just sold a house about a third of the size (which in hindsight we realize was more than enough space), and purchased the new one for less money. We thought, what a bargain!

The home needed a full-scale renovation. It was actually set up as a mother-daughter – a 3-bedroom Colonial attached to a 3-bedroom Cape configured in an L-shape, connected in the middle by a 2-car garage with an office/studio above. Oh, and with an in-ground pool out back. I look back now and wonder what were we thinking, taking on a project like that – but who loses in real estate, right? (I should mention this transaction was in 2003.)

And Then It Began

Once we closed on the purchase, we got right to planning. You might think we would consider renting one side while living in the other – that would be rational, right? But wrong, this was going to be a P-A-R-T-Y house! Main living on one side, party palace on the other. Complete with 5 bedrooms, 5 bathrooms, 2 kitchens (one with a bar), 2 living rooms, 2 dining areas, a study, a home office, a TV room, not to mention adding a covered wrap-around porch to tie it all together. WTF were we thinking?!

Anyway, once we settled on the design we got started with a complete reworking of the exterior and interior, down to the studs in most of the house, including a major reconfiguration of the connection between the two ‘houses’ which were previously independent units – a huge undertaking.

We did as much of the work as we could ourselves and my wife became the general contractor after leaving her employment when her company was sold. We were going to save so much money with her GC-ing the project. It was in essence her new job. Every weekend we would make the trip to Home Depot to pick up supplies for the following week. Our daughter soon got so sick of these weekly trips that we had to promise to take her to Chuck-E-Cheese afterward. Yes, we bribed her.

We lived on one side, while renovating the other, then switched sides to complete the other half. It was a long multi-year process. I would work my regular 9-5 during the weekdays and work on the house nights and weekends, while my wife was constantly consumed by the never-ending project. During the winter of 2005/2006, with renovations nearly 100% complete, this was now our dream home – or was it?

The Completed Project

It was also around this time that my co-workers in the fixed income, or more specifically, the mortgage investment area of the company I was working for, were becoming increasingly concerned about the quality of loans making up the mortgage-backed investment pools. Remember when I mentioned that my wife’s company was sold? She was working for a mortgage company that specialized in refinancing (frequently the cash-out version) and home equity lending. The sale was to a large regional bank who wanted to get in on the sub-prime lending action. Coupling this information with the constantly running TV ads for low or no-money down loans regardless of income or credit history, and how the whole nation, it seemed, was interested in flipping properties, we started getting nervous.

A Major Realization

As we reflected on all the work and effort – and huge property we now had to maintain – we realized that when we lived on each side of the house, while work was going on in the other half, we had more than enough house than we needed right there.

Around that time, we took a much needed vacation and visited a small Caribbean island. My wife and I often walked the residential streets in the evening and took note of how the locals lived. We noticed that the families often lived in tight quarters, usually a room or two with a small separate kitchen and bath. Family, friends and neighbors seemed to gather nightly on porches and in homes for conversation, to play music, and just enjoy each other’s company. It truly appeared to us that these may be the happiest people on earth!

Right then and there, I realized that possessions aren’t the things that make me happy, personal connections – family and friends – do. When we got home we put the house, our potential dream home into which we had poured our sweat and money, on the market. It was the spring of 2006.

Our then 6-year old daughter, who had really only known this house – and the massive project it was – as her home, asked my wife “Why are we moving out of our home?” Tough question, and to go through all of our logic with a 6-year old was not going to help. My wife simply said, home is where our family is. It’s not about the walls that surround us, the physical location, or the stuff that’s in it. Home can be anywhere – a house (owned or rented), an apartment, an RV or a hotel room when we are travelling. It is our family that makes the place a home. My daughter, while probably not fully convinced at the time, came to understand this as meaningful.

Time to Exhale

Fortunately for us, the house sold late that summer. At the closing table, both the buyer and the seller (us) were present and the paperwork was open for all to review. The buyer was a recent college graduate who had established a very successful business developing and optimizing websites for real estate brokers. We couldn’t help but notice that the financing for the purchase was by Countrywide (one of the major sub-prime lenders at the time who would eventually collapse during the financial meltdown). The two loans consisted of a 90% first mortgage and a 10% second mortgage, aka a no-money-down, Piggyback loan. It was definitely a sign of the times! After the closing, my wife asked if I wanted to go celebrate at a local pub. I said I want to deposit the check!

We waited to fully celebrate until the check cleared. That was a long three days. We moved into a much smaller rental home around the corner, one that was intended to be a flip by a long-distance investor, but the property wasn’t selling. A few years later in 2008, we decided to move west to our new hometown Crested Butte, Colorado and leave the East Coast and its high cost of living (and exorbitant real estate taxes) behind.

The Bottom Line

After reviewing the full economics of the property transaction/renovation, including all of the costs, we made very little return on investment especially given the fact that my wife’s job was that of general contractor. If she had returned to work instead (not that I think she should have as she was also caring for a young child at the time), the return on investment, while having to pay a general contractor, would likely have gone well into the red – even with the wind at our back as was the case then. Had we waited to sell just a year or two longer, we would have been deep into negative territory.

I wish J.L. Collins had published his notorious post Why Your House is a Terrible Investment a decade earlier!

After renting for the first few years in Colorado, we ultimately purchased a house in 2011. It is less than half the size of the previous one we owned – this time it needed no renovation – but true to form it was another distressed property. At least we got that right! We did not view this purchase as an investment – rather more as an economical form of shelter.

The whole time period during the renovation (and coincidentally, the German car infatuation) brought with it brief times of enjoyment, but also significant periods of stress. All because of things! I am not a minimalist by nature, but it does have its attraction at times. However, I just read a post on Our Next Life entitled Defining Simple Living for Yourself. In it Tanja discusses Simpler Living versus Simple Living. That really hit a chord with me – I highly recommend reading it.

Lessons Learned

All along, we thought that since we were meeting our planned savings percentages and recognizing that we were saving far more than most around us, we could actively spend the rest and all would be good – we would be happy. But money spent on additional things didn’t bring us increased happiness – in fact, it frequently was quite the opposite. Eventually we figured out the result of allowing our lifestyle to creep upward with increasing income levels had no correlation to our family’s happiness.

I think the one thing I would tell my younger self, if I could, would be this: as your income grows it is fine to spend a little more if it truly makes you happy, makes your life easier and allows you to pursue your passions, but seriously consider increasing your savings rate instead. Live on the same amount or just a little more than before, and you may truly find your happy place. (Oh and real estate may not be your best investment – or German cars for that matter.)

Fast forward to today, we live on quite a bit less than we ever have in the past and I would say we are the happiest we have been in our lifetimes. It’s not because we have drastically purged – far be it, we can (and will) do quite a bit more of that. We are happy because we value our time and experiences over the desire for more stuff. And, that Lifestyle Creep? He’s no longer welcome in our home.