Beware the Standard of Living Bubble.
Posted on | November 25, 2008 |
Are you living in a bubble?
With regards to finances, bubbles are usually an artificial increase in the value or price of something. We’ve all heard of the dot com bubble, or the housing bubble, but have you heard of a standard of living bubble? Are you living in one now?
What is the Standard of Living Bubble?
The standard of living bubble is defined by Investopedia as being:
“The concept of consumers living beyond their means for an extended period of time.”
Standard of living bubbles are characterized by people relying on credit cards, or home equity loans to pay for their standard of living. They may feel richer because they bought a new car or flat screen television, but if they did so relying on credit with no real wage increase or savings to back it up, they’re living in a bubble.
We see evidence in this on the large scale with national savings rates. In 2005, the average savings rate for Americans was negative, meaning they were living beyond their means.
How to Avoid the standard of Living Bubble.
Avoiding this type of bubble is easy, on paper. Live within your means. It’s more difficult in practice than it sounds however. If spending less than you earn was easy, people wouldn’t be in debt.
Another tool in standard of living bubble avoidance is your savings account. I prefer HSBC and ING because they’re simple, secure and pay a high yield. Don’t buy things on credit or layaway - plan ahead. Use that installment payment you were going to make repaying the credit card for the item and pay yourself first, saving up for the item instead. You’ll earn some interest along the way and avoid taking on needless debt.
It’s so simple it almost sounds stupid, but the fact that so many people don’t think this way to begin with shows how difficult it is for most people to put into practice.
Photo by tlindenbaum
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