Recently, I was having a conversation with someone who commented on how appalled they were that a friend of ours, with a high-level and high-paying job, had recently purchased a very basic car. “How can he drive that cheap car when he has such a high-level job?! It just looks bad.” Huh?
The comment got me thinking about lifestyle inflation and how most people, no matter how much they earn, will never accumulate any wealth. Instead of saving and investing money as they earn more throughout their career, they spend it as fast as they make it. Their explanation for why they have to keep spending? Their life has to reflect their job title and salary. Yikes.
I call this the lifestyle inflation metric. The more you make, the more you spend. Huge swaths of the population subscribe to it and it’s keeping them perpetually in debt and making them poor.
A couple days after that conversation, I saw the headline about Roberta Buffett’s $100 million gift to Northwestern University and that got me thinking about her brother, Warren Buffett.
Everyone knows who he is – one of the richest men in the world. In 2014, he bought a 2014 Cadillac XTS and traded in a 2006 Cadillac DTX. Warren Buffett, the billionaire, was driving an 8-year old car! According to Kelly Blue Book, the 2006 Caddy was worth around $12,000. The new car cost around $48,000. If you subscribe to the lifestyle inflation metric, you find this appalling. He should be driving a rare Ferrari or a Maybach or something more fitting his position and wealth. And he should replace it every couple years.
Warren Buffet’s modest Omaha home.
Now, let’s talk about his house. Warren Buffett lives in the same house he bought for $31,500 in 1958 (see picture above). It’s in the best neighborhood in Omaha, and according to Zillow, it’s worth around $775,000 now. When Buffet bought that house, he was already a millionaire. According to the lifestyle inflation metric, he should be living in a grandiose mansion(s) that is a reflection of his job title and income.
What the lifestyle inflation followers don’t realize is this is how he went from paperboy to millionaire to billionaire. As he made more money, instead of spending it on things like bigger houses and fancy cars, he invested in the stock market and became wealthier. And wealthier.
There’s a phenomenon that occurs in Omaha from time to time. Some little old lady will die and will stun the community by leaving $5 million to the University of Nebraska. No one knew she was rich! She was an early investor in Berkshire Hathaway but never told anybody. As she became wealthier and wealthier, she continued living in an ordinary home, drove sensible cars and did the same things that non-millionaires do in Omaha. According to Bloomberg, there are millionaires all over the greater Omaha area hiding in plain sight, called The Buffett Millionaires. They aren’t ostentatious. Many still work. Many use their money for philanthropy.
So here’s what we can take away from this:
- Your home is where you live. It’s not a banner for what you’ve accomplished in life. Buy something you can easily afford. Invest the savings in the stock market. Pay off your house as quickly as possible and live in it on the cheap when you retire.
- Your car is transportation. It gets you from Point A to Point B. It’s not a reflection of your job title or your salary. After 8, 10 or 15 years, it’s going to eventually end up in a landfill. Buy basic, low-cost transportation. Invest the savings in the stock market.
- Apply these same principals to all facets of your life. Buy moderately priced things, take good care of them and keep them until they wear out or break. Invest the savings in the stock market.
- Don’t live how you think millionaires live. Live like regular people do. Wealthy people don’t always flaunt their wealth. Many people who look wealthy (lifestyle inflators) are poor and some people who live modestly can be quite wealthy.
Don’t buy into the marketing hype of the lifestyle inflation metric. The rich didn’t get rich by blowing all their money on junk and living ostentatiously. And as they get richer most don’t change the way they live. Instead they get richer. Your home and your car don’t define you. You don’t need a bigger or better or newer “fill in the blank” to be happy. So kick the lifestyle inflation metric to the curb and live like Warren Buffett.
Wow, this post is really good! I believe in this idea and I am feeling good to know that i am not alone!
SOOO well said! I get so sick of people saying, “Oh, you can afford XYZ because you’re (hubby) an engineer!” Our reply, “No, not really.” Okay, we probably could, but we choose not to. My car is a 1997 VW we purchased with 8 miles on it (we had it special ordered). It just turned 196,000 yesterday. Most of our furniture is hand-me-down (inlaws’ 1965 dresser in our room for instance) or laminated particle board we purchased our first year of marriage in a 400 sq. ft. apartment. We have purchased homes at less than half of what the bank says we “can afford”. So we remain debt-free and are paying cash for our son’s college.
I would say one thing, though. When we buy something, we buy quality. Then we use it until it is at the end of its useful life.
It.just.isn’t.worth.it.
I agree that it’s better to live below your means instead of keeping up with the Joneses. I have a paid for mobile home that looks like a little house, not a trailer. I have a 2003 Chevy Tracker with 61,000 original miles on it – best car I’ve ever owned.
Several years back there was a best seller book titled “The Millionaire Next Door” that talked about this exact thing. I believe there is an update. Although written by 2 professors, it was easy reading. I recommend it highly.