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Yesterday we said goodbye to “The Bandit” – Burt Reynolds.  In 1977 together with Sally Field, Jackie Gleason, Jerry Reed, and his dog Fred they provided us with laughter as we watched the Bandit, Frog and the Snowman outwit Sheriff Justice T Buford and his “handsome but slow-witted son” Junior.

Trucking was an integral part of the ongoing US recovery from the 1973-1975 recession.

The longest and deepest economic recession since the end of World War II began in the late fall of 1973 and hit bottom in midwinter 1975. Since then the economy has grown vigorously: by the end of last year, production had increased at least 16 percent, and more than 7.7 million workers had found new jobs – Thomas M. Supel Senior Economist Research Department Federal Reserve Bank of Minneapolis

Forty-one years later in 2018, our economy continues growing yet many Americans are living from paycheck to paycheck.

How many?

According to Careerbuilder.com, “almost 8 out of 10 American workers say they live paycheck to paycheck to make ends meet, according to a new survey from CareerBuilder.”

Many blame stagnant wages and the rising cost of everything from education to many consumer goods yet I find a third reason that impacts many of these people.

Lifestyle Inflation

Lifestyle inflation is a dirty word as it wrecks havoc on your plans and goals to reach financial independence.  Many people see it as “Keeping up with the Jones”.

It’s hard to put your finger on what exactly lifestyle inflation looks like, but we have all fallen for it at one time or another in our lives, including me. It’s that new car we purchased that we got with dealer financing. It’s the big mortgage we were offered by the bank to buy our “dream home.” It’s that all-inclusive vacation we bought with our year-end bonus. These are symptoms of a cultural disease we have and is called lifestyle inflation.

The BIGGEST LIFESTYLE MISTAKE IS DEBT.

Debt Sucks – It’s the American Way – right?  No, I am being sarcastic.  The only thing that debt does is make someone else rich.

These are my Top Three Debt Lifestyle Inflation Mistakes

The 30-Year Mortgage – Before you sign up for making payments for 30 years build a mortgage spreadsheet. Take your interest rate, the term of the mortgage, your payment, and plug it all into a spreadsheet to see how it amortizes over time?  It’s a pretty good exercise. Here is the key step—open that spreadsheet and add up the interest you will pay over time, assuming you don’t make any prepayments.  The answer to what you pay for a $250,000 house with a 30-year mortgage at 4$ will make your head explode.   You pay $179,674 in interest.    Change it to a ten-year mortgage and it reduces to $53,735.   Then figure out how to pay it off in five years.

No Thirty-year mortgages.  If you cannot afford the house any other way then you are buying too much house.  Be cheap.  Your reward will come very fast.

Actually, there is something worse than a 30-year mortgage it is CREDIT CARD DEBT. It is like flushing money down the   Whoooooooooooooosh………  You are borrowing money from your future and paying someone anywhere from 12% to 29% for the privilege.

The Car Lease – American love their cars and according to The IHS Markit study showed that vehicles are being made with better quality nowadays, leading American consumers to own them longer. According to IHS, the average length of ownership was a record 3 months or nearly seven years. Why lease a car for 36 months?  It is called keeping up with the Jones’.  Buy the car.

Leasing a car is a bad idea for many reasons. The first reason is at the end of the lease you have nothing to show for all the money that you spent. You either must turn the car into the dealer (where they try to convince you to trade up to a new lease) or you must purchase the car at the end of the lease. There are also hidden fees associated with leasing a car. Often the mileage limits are difficult to stay under, and you may find yourself paying over mileage charges at the end of your lease.

It is time to kill off Lifestyle Inflation.

Do you recognize yourself in some of these debt mistakes? Or maybe you are feeling the pressure or temptation to upgrade your lifestyle or make a big splash to let everyone know you’ve made it in life.

What is your next step?

Get a financial plan, set goals and stick to them.  I believe in setting 1, 3 and 5 Year Net Worth Goals.  If you don’t measure it you cannot achieve it.

If you are ready to create a financial plan for yourself, then click below and get started.  You enter your information with a simple 6-step guided process, see a net worth summary, and track budgeting, spending, and cash flows.

Create Your Personal Financial Plan

 

Michael Tannery CPA, CDFA® AIF®

Registered Principal

Tannery & Company

Tax – Accounting – Wealth Management

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