Lifestyle inflation is the unnecessary expansion of spending to match an increasing income.
Most people can probably recall that as a student or perhaps at the very beginning of our working career we managed to live on almost no money at all. Life was pretty good and while sacrifices had to be made because of limited funds, life went on.
For most people, landing a full time job or getting their first major raise was a signal to get a new set of furniture or move into a bigger house. Maybe it justified taking a car loan out because “I need to be able to get to my new job!”, but almost invariably our spending increases as we have more income.
This seems to accord with the most recent data from the U.S Bureau of Economic Analysis suggesting a personal savings rate of only 4%. As part of our modern society it seems extremely normal to spend almost all of the money we have available. The baffling thing is that almost everyone has experienced a period in their life where they have been forced to cut back spending, perhaps through unemployment, the birth of a child, illness or an unexpected emergency.
We know how to be frugal. But we choose not to be.
There is not necessarily any need to return to the extremely austere life of a university student subsiding on noodles alone, but if we are to retire early and break out of the cycle of wasting our entire productive adulthood at work, we need to combat lifestyle inflation.
Signs that you are suffering from lifestyle inflation
If one or more of the following lifestyle inflation symptoms applies to you, you might need to consider whether your spending is holding you back from attaining an early retirement.
- If you receive a large windfall, you think immediately of something to buy with it
- You always hold a credit card balance
- You live paycheck to paycheck
- You feel the need to get the latest device or consumer product when the item it replaces is still working perfectly
- If you regularly suffer from ‘buyers remorse ‘
- If you care about matching the spending of someone else
- If you replace your car while your old one is still working
- If you take on debt to buy consumer products
- You associate spending with happiness, but normally don’t feel any lasting happiness after a purchase
- You worry about what is fashionable
Retiring early from work is not an easy task, and it’s made absolutely impossible if you suffer from any of the above. If you recognize any of the above symptoms and aspire to retire early then you need to consider whether the benefit you are getting out of your spending habits would exceed an entire adulthood of freedom from work.
For some people it might be, but for me, having the latest jeans that a celebrity is wearing is almost laughably unimportant when compared to financial independence.
How to combat lifestyle inflation?
The first step is to identify a spending threshold above which you resolve to save every last penny in a long term investment account. I like to set this number as a percentage of net income (after tax and compulsory payments) based on how far away your planned early retirement is.
- A 25% spending rate means that every year of spending a quarter of your salary you are saving 75%, or three years worth of living expenses at that spending rate.
- A 50% spending rate means for every year of work you have earned a year of retirement.
As I noted in my article on reducing spending v increasing income, here are some of the effects on early retirement times if you achieve an extreme spending rate:
10% of income = free in 3 years
15% of income = free in 5 years
20% of income = free in 7.5 years
25% of income = free in 10 years
If you decide, like I have, that a 25% savings rate is achievable or is a good aspiration, then work out for you what that means in dollar terms and then use a good budgeting or tracking software like YNAB or Mint. Then stick to it!
It normally requires reversing many of the problems I have identified above. Which is essentially making the realization that spending more isn’t linked to more happiness and that it is not possible to keep up with the spending of other people, and that it is OK to not have the latest gadgets. The concept of enough is discussed in detail in Your Money or Your Life and really is a must read book for anyone aspiring for an early retirement.
When you set a monthly target, try to set up an automated payment to a long term investment account or perhaps an automatic payment into your mortgage (if you live in a country with higher interest rates than the US). Automated payments timed to coincide with being paid are a very effective way of forcing you to be frugal. Pretend that the amount left is genuinely all you have left to spend, like back at college or back when you were in your first job.
I genuinely believe that spending less doesn’t mean enjoying life less. Take a look at the changes you have made in your spending as your income has increased and genuinely ask yourself whether you have seen any increase in net happiness. If you haven’t, or the increase in happiness is not proportionate to the increase in spending, think about trying to do something about your lifestyle inflation.
Recognize that it’s standing in between you and a life of travel, of doing what you want, of helping others without worrying about money and of financial independence.
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