Consider Your Anchors // How We’ve Dodged the Lifestyle Inflation Bullet

hiya friends. we’re still working on a big post on obamacare and reverse engineering our post-retirement budget around health care subsidies, but it’s taking a bit of time to get right. hope to have it up here in the next week or two!

we’re not saying anything new by saying that lifestyle inflation is one of the biggest financial killers out there. lifestyle inflation leads to low savings rates, often to consumer debt, and that pit-of-your-stomach feeling that you can’t get off the endless work treadmill for fear of utter ruin. it’s such a tragedy that we don’t teach kids about the perils of lifestyle inflation, and instead glorify consumer culture and the continual upsizing of our lifestyles, and the result is that so many of us feel trapped in cycles of debt and spending and stresss and hopelessness. we feel quite certain that we could show our nation’s rising health care costs if we could just give people better financial education, and seriously reduce the toll that stress takes on everyone’s health!

we are as guilty as anyone of upsizing our spending at various times (just read about our baller days for a little flavor), mainly on restaurants and travel, but are thankful that several key factors have kept us from permanently inflating our lifestyle, despite the normal challenges that we’ve had to overcome in going from not naturally frugal to our now reformed state. we call these positive influences our anchors, named for the anchoring effect in psychology. in short, the anchoring effect or anchoring bias is the tendency to rely too heavily on the first piece of information you learn about something in making decisions.

here’s a hypothetical example: the first pair of shoes you ever bought for yourself cost you $30. you saved up for those shoes, or you got money from your parents but wanted to make it stretch farther, and so you passed on the $40 and $50 shoes and went with the $30 pair. (we are specifically remembering how we each, though a few years apart in age in the late 80s, passed on buying those sweet reebok pumps that we really wanted, because the cool kids had them, and instead bought lesser reeboks. though the mr. went on to buy the pumps after they were no longer cool, and learned through ridicule that it doesn’t pay to chase fashion.) now, because you paid $30 for shoes, $30 seems like a good price for a pair of shoes, and anything more seems expensive, anything less seems like a bargain. that is the anchoring effect. if someone presents you with $100 shoes, no matter how full-featured they are, they will seem too expensive.

in our case, because we’re fairly stubborn people, we have stuck to our anchors even as our incomes have increased. as we felt like we had more money to spend, we bought more of some things, but rarely did we jump up the price scale, except if we’re talking about restaurants. so even at our peak spending, i would still go to dsw if i needed a pair of shoes, and gravitate toward the $40-60 pairs instead of those costing more. if the mr. needed a pair of jeans, we’d still go to the gap, not bloomingdales, and would do our best to buy those jeans during a sale. (we’ve been validated in this tendency by all the info that has come out in recent years that even the most highly priced brands are produced in basically the same sweat shops as the ultra cheapo fast fashion brands — so you don’t necessarily get more quality when you pay more. but you often do get lower quality when you pay less, and that’s why we don’t generally buy clothes at h&m or the like, because we expect our clothes to survive more than one wash. and now that we’re in mega-savings mode, we buy very little at all, and seek out used first, which also suits our enviro-frugal values.)

once, when i was in college, i remember going shopping with a friend, and on that outing, we went into neiman marcus to buy some hair conditioner that you could only buy there that i’d read about in some magazine. i’m sure a lot of people can relate to this experience, but the staff definitely did not make me feel welcome in the store. i remember thinking, “i’m clearly a college student, which means i’m trying to qualify myself for a good career. don’t you think they’d want to be nice to me in hopes that i’ll make tons of cash one day and will then have warm feelings toward their high end store?” evidently not, because the staff did their best to out-snooty each other, and i left feeling like there was no way i’d ever be a regular neimans shopper. (thank god, right? they actually did me a favor!) the lesson that i took to heart from that was: i don’t need to aspire to shop at “better” stores or for “better” brands. i wouldn’t want to shop anywhere that makes some people feel unwelcome, anyway (why would i reward such snobbery?), so that seemed like such a foolish aspiration.

but i’m grateful for that lesson, and have carried it with me ever since, keeping my anchors firmly entrenched on prices that correspond to products and brands that are “good enough.” when i see friends starting to venture into the realm of expensive handbags, i have no urge to follow them, because i know that my anchor for a purse is $50 or less (and purchased at most once a year, not on a regular basis), so they might as well be buying maseratis or maybachs for all the relevance these exotic handbags have to my life. and, oh yeah, i also don’t hang out with friends like that much anymore!

but the same rule applies to just about everything we have purchased or would consider purchasing — we never even thought about buying a lexus or a bmv when we knew that a honda would do just fine (even though all of our colleagues were driving much nicer cars than us) because anything above $25,000 is just too much to pay for a car in our view, or about buying that sweet new arcteryx backpack when kelty makes one that’s just as good (for non-backpackers, arcteryx is a swanky outdoor brand, and kelty is more workhorse), because even a very lightweight and technical backpack just shouldn’t cost more than $175. this is the power of anchors.

if you’re at that point in your career when your income is starting to increase to where you are no longer living paycheck to paycheck, and you get treat yo self itch, do yourself a huge favor and think about your anchors. if you’re accustomed to paying $60 for jeans, don’t go out and buy the $300 jeans, because then you’ll set a new anchor, and now $300 for a future pair won’t seem so expensive. instead, splurge on some experience that you wouldn’t do otherwise, and that won’t create a new anchor that you’ll fall back on for years to come.

just knowing about anchors is itself powerful, and helps you better determine if something is really the “deal” it appears to be, or is just a store’s trick to get you to buy more. but given that lifestyle inflation is the single biggest barrier to most people’s financial independence, it’s worth making every effort to keep your anchors low.

are you conscious of your price anchors? anyone found your anchor prices creeping up over time? or have you successfully adjusted your anchors downward? we’d love to know!