Ah, lifestyle inflation. This is an issue that has gotten a lot of attention from financial bloggers around the world, and for good reason. People’s inability to save money is most likely due to lifestyle inflation.
People tell themselves, “I’ll earn more money later in my career, so I’ll just save then,” while simultaneously thinking “I make decent money now, so I can afford to upgrade my car/house/wardrobe/whatever-the-hell-kids-are-buying-these-days.”
In a nutshell, lifestyle inflation is what causes you to abandon eating ramen in favor of steak. It’s what makes you stop shopping at the thrift store, and start shopping at the mall, then your personal tailor.
What is Lifestyle Inflation?
According to Investopedia
“Lifestyle inflation refers to increasing one’s spending when income goes up. Lifestyle inflation tends to continue each time someone gets a raise, making it perpetually difficult to get out of debt, save for retirement or meet other big-picture financial goals. Lifestyle inflation is what causes people to get stuck in the rat race of working just to pay the bills.” — Investopedia
Consumers enable themselves to spend more money whenever they obtain a promotion or a pay raise. On the one hand, it may seem nice because they have worked extremely hard to advance and gain this recognition. As a result, they wish to demonstrate their achievement by proudly purchasing something they previously couldn’t afford.
The majority of lifestyle changes appear to be minor or one-time events. However, the problem may not be the improvements themselves, but rather the attitude of always updating everything. Small modifications in a variety of areas may add up to a lot of money!
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What are the common excuses for more spending
There are all sorts of shitty excuses for this. The most common is probably the fallacy of feeling like you “deserve” something.
I worked extra hard this week, so I deserve to eat out tonight.
I just got a lot of exercise, so I deserve to treat myself to this outfit.
I’ve been a good dragon all week, so I deserve to burninate those peasants.
Look, I’m all for eating out, buying clothes, and burninating peasants, but ONLY if you’re doing it because you’ve consciously decided it adds value to your life. If you’re doing it out of convenience, you’re doing it wrong.
Today, we have formed the habit of comparing ourselves with our friends, neighbors, celebrities, and even random stranger on social media. When we look at their flawlessly managed photographs, we frequently feel as though our own achievements are insufficient and that we want more, which can lead to excessive lifestyle inflation.
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Why Lifestyle Inflation is Bad
Here’s the thing: lifestyle inflation is a two-headed monster. It hurts you twice. On the one hand, your yearly expenses are larger, so you need a larger nest egg to reach financial independence. On the other hand, since your spending has increased, you have less money to save per year. Hosed on both ends.
You may be compelled to work harder than ever before if you don’t save any money and your only “investments” are your home and automobile. That’s because you keep raising your spending rather than investing in assets that generate revenue.
As a result, you don’t have the option of taking some time off from work. You can’t afford to quit your work to start your own startup. Most significantly, you won’t be able to accumulate big wealth since you’ll be selling your time for money, which has very little upside.
Let’s use an example. Of course, first we are going to need some assumptions. We’re going to assume a 5% real return on investments (this means after inflation). We’re also going to assume that you can safely withdraw 4% of your nest egg every without ever running out of money (per the Trinity Study). Of course, nothing in life is guaranteed, but these numbers will work to illustrate the point I’m trying to make. On to the example.
Kringlebert Fistybuns (NSFW – language) makes $70,000 a year, and spends $35,000 a year. His savings rate is 50%, which means he’ll be able to retire in 16.6 years. But what happens if decides he ‘deserves’ to eat out a few more times, take an extra vacation, and buy some extra gadgets/clothes? Let’s say these new expenses add an extra $6000/yr to his expenses, bringing the total up to $41,000.
His new savings rate is about 38.6%.
This means that he will now be able to retire in 22.4 years. Talk about a terrible return on investment! Spending an extra $6000 a year means he’ll basically have to work an additional 8 years! Sheesh.
- If you are currently saving somewhere in the 10-15% range, every additional percent you spend adds 1.8-2.0 years to your working career.
- If you are currently saving somewhere in the 25-30% range, every additional percent you spend adds 0.7 to 0.8 years to your working career.
- If you are currently saving in the 50-55% range, every additional percent you spend adds 0.4-0.5 years to your working career.
One percent may not sound like much, but it can mean the difference in YEARS off your working career. Especially if you aren’t currently saving an extreme amount.
I’ve been phrasing all this in a pretty negative light but luckily there’s a silver lining. In the same way that lifestyle inflation is a two-headed monster, hurting you in two ways, cutting your expenses works in the opposite way. It gives you double benefits.
You need less money to retire AND you have more money to invest. Win-win, baby.
Of course, personal finance is personal so only YOU can decide what purchases add value to your life, and exactly how much they are worth. All I’m saying is that you should think really, REALLY hard about adding any recurring expenses to your budget. Make sure that whatever you are buying is truly worth your time (in the form of hard-earned cash).
Because remember, lifestyle inflation hurts you twice, both heads of the monster take a bite. On the other hand, cutting expenses gives you a double benefit. In fact, cutting expenses is the double rainbow of personal finance. You heard it here first :).