What is a Standard Of Living Bubble

The standard of living bubble is the theory people are living beyond their means over extended periods of time.

BREAKING DOWN Standard Of Living Bubble

The standard of living bubble specifically deals with consumers who rely too heavily on credit cards and borrowed money to pay their way. This goes beyond using a credit card to pay for an unexpected cost in the event of an emergency and deals more with people who regularly make purchases that they can not afford to make, and do so by using credit instead of savings or other existing funds.

The idea is characterized by people compensating for a lack of increased earnings by taking out more and more debt to give the illusion of an increased standard of life.

This was most notably the case during the recession in the mid-2000’s when earnings across the United States stagnated, and in some places fell. Many people were said to have negative savings at the time since they owed more on credit than they were earning. The idea that this bubble will burst, and bring about consequences, speaks to both a national and personal problem. Once a person has run out of available credit, but still finds that their spending remains the same, they will be unable to continue with their current standard of living and in some cases, unable to make the minimum payments due for the lavish lifestyle they have grown accustomed to. On a national level, this bursting bubble could lead the economy into another recession.

This is also known as overextending your credit and living beyond your means.

An Example of Living Beyond One's Means 

Take the example of Mike Jones. In 2006 Mike was offered a job at the prestigious law firm Smith, Lock and Fritz. During this time, he was receiving a monthly salary of $2,500. This was more than enough to cover his $1,000 a month rental payment and his utility bills, which allowed him to put a side a little money each month into his savings account. However, the economy went into a recession and Mike didn’t receive a raise for several years. When he first took the job and had minimal monthly obligations, he was able to live quite comfortably but his needs changed over time. He purchased a new car and moved into a nicer apartment. Now his monthly rental payment was $1,800 a month and his car payment was $300 a month. Mike no longer had much money left over to put into savings.

He began using his credit cards more and more to make purchases like dinners out and concert tickets. By 2010 Mike’s wages had only increased slightly, but his spending had increased significantly each year. By 2018, Mike had maxed out of all his credit cards. To try and get some control over his debt he had even refinanced his auto loan to take advantage of the equity he had built there. He was still making a monthly payment on his car a decade after he had purchased it. Mike’s standard of living bubble had burst and he could no longer afford to maintain his lifestyle while meeting his monthly obligations.