Avoiding Lifestyle Inflation: Financial Advice I Wish I Knew When I Began My Career
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The below post is written with young lawyers in mind (as I can only speak from experience), but I think it applies to many other professions. Also, full disclosure: Ms. OYP and I have made many of the mistakes below and you can read how Ms. OYP paid off $98,500 in 3.5 years here. We want to help people avoid these mistakes before they happen, or help people reverse their financial courses if they’re currently in the throes of upgrading their lifestyles.
What is Lifestyle Creep?
Lifestyle creep. It happens to most professionals, unfortunately, but what is it? Well, it’s when you upgrade your lifestyle (i.e. spending) as you make more money from your job. In the lawyer context, we go from being students for 7 years and making no money. We then spend a year of articling (in Canada) making a fairly modest salary. During those 8 years, we tend to live like students and keep our expenses down in order to not spend more than we make.
However, something funny tends to happen at the end of those 8 years. We start to get the itch to upgrade our lifestyles. This happens for 2 reasons:
1. We’ve “deprived” ourselves for the last 8 years because we’ve been making little to no money; and
2. We get a substantial pay bump when we get called to the Bar as lawyers.
At this point, young lawyers often feel that they “deserve” to spend more money because they’ve put in so much work to get to this point. I often see lawyers buy new cars, houses / condos, suits, purses and shoes (gotta fit the image, right?) as soon as they end their articles. Lawyers’ salaries also generally go up every year, so lawyers often feel that they can outspend their salaries, because they’ll make more next year – may as well buy whatever they want now since they’ll be able to “afford” it as their salaries go up, right?
The "Golden Handcuffs"
Law firms are very good at impressing upon junior lawyers that, sure they’re not making much money in the beginning of their careers, but they’re going to make a lot of money once they’ve put in their time and become partners! Partnership tends to happen between 5-10 years of becoming a lawyer (assuming the lawyer performs as an associate). So, young lawyers are encouraged by their firms to buy new cars and houses, because they’re going to make so much money later on. Partners love to see junior lawyers spend their paycheques because the “golden handcuffs” become tighter and the partners know that those juniors will work harder and for longer because they’ll need their salary in order to afford their new found lifestyles.
There’s just one problem with this pattern. A lawyer’s life is hard! We work long hours under large amounts of stress with some miserable, sadistic workaholics. Many junior lawyers end up disliking their jobs and start looking for a way out early in their careers. (Speaking from experience, many of my classmates are no longer in private practice. Some have gone to government departments, some became in-house counsel to corporations and some have left the law altogether. Salaries for government and in-house lawyers tend to hit their peaks earlier on and at a lower amount than private practice lawyers. So, lawyers who make the choice to leave private practice often miss out on the opportunity to make the “big bucks” later on as partners in firms.) Many of the lawyers that stay in private practice are miserable in their daily lives. Is it really worth the extra money to stay in private practice if you’re not happy?
Given this, I think it’s incredibly dangerous for junior lawyers to spend their paycheques and forego saving until later once they’ve established themselves and are making the “big bucks”. I’ve had many conversations with lawyers who feel trapped by their private practice jobs because they’ve drifted through the last few working years just spending their money without intention. Sure, they have nice houses (with large mortgages) fancy cars (with loans), nice suits and purses, but they have little to no savings! So, when they wake up and feel like they have to get out of their private practice job because they’re simply miserable, they panic and realize they can’t since their lifestyles depend upon their paycheques! Don’t be that guy or girl.
If you’re at the beginning of your career, great, start with good financial habits before you feel trapped in your job by your lifestyle. Sure, you may like your job now, but odds are you won’t in a few years. Here’s my advice:
1. Spend the first few years continuing to live like an articling student.
As mentioned above, articling students make a modest salary. So, once you get called to the Bar and in the ensuing years, live like you did when you articled. Take your extra salary and save it. Each year when you get a pay raise, exercise some discipline. I don’t care if you save your money in order to buy a house later or save it to invest, just do it!
If you work for a few years and still love your job, that’s great, you’ve just set yourself up well with a large fund to put a big down payment on a house (that you can actually afford), or you can keep adding to your savings to build your retirement / emergency fund. Either way, you’ll be way better off than your colleagues who went out and upgraded every facet of their lives.
If you dislike your job and want to jump to a lesser paying law career, then you’ll have the financial freedom to do it since you’re not relying on that large private practice salary just to keep paying your expenses. The effect is twofold:
- You’ll have an emergency fund in case you absolutely have to leave your job even before you have a new one lined up; and
- Your expenses are low enough that you can accept a lower salary without sacrificing your lifestyle.
If you can keep your expenses in check, you’ll need less to live on than your colleagues and you’ll have the freedom to leave your high stress job for a lower paying job, if you so choose at some point. Isn’t that the dream – to be able to make life and career choices for yourself based upon your values, instead of having to stay at a job you may not enjoy just so you can make those boat payments? Having enough money saved up gives you the freedom to live life on your own terms and the power to say “No” to things you don’t want to do at work.
2. If you must buy a house right away, buy one you can actually afford.
This is the classic keeping up with the Joneses scenario. Other lawyers are living in beautiful homes in affluent areas, so you should too, right? Young lawyers often go out and buy those expensive homes because their mortgage broker says they can “afford” it. Sure you can afford it on paper, but when most of your paycheque is going to pay your mortgage, you’ll again be beholden to that private practice job. Plus, once you have that expensive home, you’ll need to furnish it with the best of the best just like your colleagues – after all, if you have your colleagues over for dinner some night, you want them to see how “nice” your place is, right? You’ll want a fancy security system to protect all of your stuff. Oh, and may as well add on that deluxe cable package since you’ll need to unwind with some quality programming after a stressful day at work.
You get the point. After all is said and done, you’re working just to afford that house and all of that stuff, just to impress the people around you (some of whom you may not even like!). The result is that you’re now stuck in that job you may dislike for the foreseeable future. Sounds like a prison sentence to me.
3. If you must get a car, buy it used.
I know it’s tempting to “buy “(with a loan) that new Mercedes or BMW to show the world you’ve made it! You want to ride to work in style and comfort. Just hold on there, cowboy! Nothing kills your ability to accumulate wealth faster than locking yourself into paying for a depreciating asset for 5 years. You’ll be paying thousands of dollars in interest over the life of the loan, and, at the end of it, you’ll have a vehicle that is worth WAY less than you bought it for. By that time, you’ll probably have gotten sick of it anyway and will NEED to go buy a new one and lock yourself into this cycle again.
It’s a great way to literally throw many thousands of dollars out the window – not to mention the opportunity cost of not investing it (i.e. missing out on years of dividends and/or capital appreciation).
Instead of buying that $50,000 BMW, how about searching around for an older version of that vehicle for a price you can pay in cash for? Or, swallow your pride for a few years and buy a used Honda or Toyota. You’ll still get to work each day and your future financial self will thank you.
4. Make your lunches at home.
I know it’s not fun to meal prep or to make your lunches the night before. I also know it’s easy to just walk out of your office and buy something in the food court or go to that trendy restaurant for lunch. Besides, you need a break from grinding away on that transaction or that statement of defence all morning, right? Well, that decision to buy your lunch everyday really adds up. Not only does it become an expensive habit, it’s generally not good for your waistline. With a little intentionality, you can spend a few minutes on Sunday and plan out your week’s lunches and then pack them each weeknight. You can make healthy choices for a fraction of the cost of going out for lunch. Then, take the money you’re not spending on lunches out, and save it.
I can hear you saying, “ya, but I need my lunch time to socialize”. Well, how about taking your packed lunch to a common area within your office and socializing with the people there? This way you’ll get to connect with people around the office that you might not have chosen to go out for lunch with. Who knows, you might end up eating with a partner you want to work with and it might lead to a great opportunity.
5. Avoid after work drinks.
This is in line with the point above. After work drinks are fun and build camaraderie, and I encourage you to partake in them occasionally, but try to limit your attendance. These happy hours can get expensive, and, again, if you do it too often, they’re not great for your health.
Final Thoughts
Look, I’m not saying you have to live in a van down by the river, only eat ramen noodles and wear hand-me-down suits that are too big for you, I’m just urging you to be sensible in your financial choices. Do you really need that giant house right this moment? Chances are that you’ll realize pretty quickly after moving into it that you don’t use most of the space and you’re paying more than you thought to heat / cool it. Do you really need that Mercedes in your first couple years being a lawyer? You might just feel silly driving it after a few months as you look around and realize most of the people your age are driving “normal” cars and seem just as happy with their vehicle choices. You’ll also probably get really sick of paying that high interest car loan off after the initial excitement of having that car wears off and wish you had the money you’re paying each month for other things.
If you survive your first 5 or 10 years in private practice, then go ahead and fill your boots. But, use your first years in the law to build up your emergency fund, max out your TFSA, contribute to your RRSP, start a taxable account, etc., (see how I invest here and learn the difference between the RRSP and TFSA here) so that if you decide you need to make a career move, you’ll be in the financial position to do so. What’s the worst that can happen if you do this? You’ll be angry at yourself when you look at your accounts after a few years and realize you’re well on your way to becoming financially independent? Doubt it. As lawyers, we have an amazing opportunity to set up our financial futures if we just delay temptation since our salaries are large and grow as we gain experience. So, don’t squander your opportunity, save as much as you can. Trust me, with intentionality you’ll still be able to live great lives and save a large portion of your income.
I don’t want to come off as preachy. As I mentioned at the beginning of this post, Ms. OYP and I have fallen victim to many of the above wealth killers. So, I speak from experience and wrote this to help you avoid making the same mistakes we made. I intend to write a post on my biggest money mistake (buying a luxury vehicle because I could “afford” the payments just as I urge you not to do), but, for this post’s purpose, suffice it to say that Ms. OYP and I have made our share of mistakes. We’ve worked hard on getting our finances on track and want to help you before you fall prey to lifestyle creep. We truly believe that being in a good financial position gives you the power to be true to yourself in your career and the freedom to make career choices based upon what is best for you, not based upon the need to pay your bills for things you don’t need.
Remember, just because you make money doesn’t mean you have to spend it all! If you read The Millionaire Next Door, you’ll realize that income does not equal wealth. Often times, the high earners do not have high net worths. A lot of that can be attributed to lifestyle inflation. They make a lot of money, so they spend it to look rich. Well, here’s the secret: the only way to build wealth is to spend less than you make. Figure out what’s important to you and spend your money on those things. Don’t spend to impress people around you and to keep up with your colleagues.