Lifestyle Inflation: How It Prevents Financial Independence
Being Happy with Little Money
Friends, some of the best times I ever had were in college. I enjoyed:
- painting with my girlfriend and babysitting her annoying dog.
- grilling/burning cheap steaks on our mouse-infested grill on the back of porch.
- living with and philosophizing with some of my best buddies.
- walking to the sticky-floored bar that served pretty decent wings and cheap pitchers of beer. Or, maybe the wings just tasted decent after a few pitchers of beer, I don’t know.
Memories of college are filled with so many fun times and terrific people that I will never forget them.
During this time in college, I was broke. Sure I’d have some beer money but I don’t think I ever accumulated more than $10,000, even after spending the summer working internships. This college experience really showed me that I didn’t need tons of money to be happy. I lived the lifestyle of a broke college student while having the time of my life.
Finally Making some Moolah
After graduating college, I happily accepted an engineering position and started making $64,000 out of the gate. For someone used to living a modest college lifestyle, this is a nice chunk of change. In addition to a respectable yearly salary, the company gave me $7,000 for moving expenses. It definitely didn’t cost me $7,000 to move my mattress and computer 80 miles south but hey! I’ll take it! For the first time, I was able to start making more impactful investments that would ultimately enable more financial independence. While I eagerly met my 401k match, maxed out my Roth, and created after-tax brokerage accounts, I was floored to see “kids” I graduated with buy brand new 2015 trucks!! For the first time in their life, they could be getting ahead financially. Instead, 450 dollars that could have been used to reduce their debt or buy index funds, was being sucked out of their bank account every freaking month to purchase one of the most rapidly depreciating tools that you can buy. In their defense, at least their 2015 truck will catch some envious stares from people stuck in the same traffic jam during their morning commute. As a side note, I’m all for buying sweet, brand new vehicles, I just wouldn’t do it until I accumulated at least a few hundred thousand dollars.
Here’s something to ask yourself: Although this purchase makes me happy now, will it continue to produce the same amount of happiness in the future?
The Birth of Lifestyle Inflation
Unfortunately, buying the brand new vehicle right out of college is generally only the beginning to a lifetime of unfulfilling purchases. Just as the college graduate relishes with their new purchase after landing their big boy job, future raises or windfalls are generally treated the same way. Five years later when the individual is promoted to group manager, they will probably have decided that their $150,000 three bedroom two bathroom “starter home” is too barbaric for a young working professional. When this individual moves into the $400,000 home in the neighborhood farther away from work, the raise that their promotion yielded is immediately consumed by the higher mortgage on the new home.
Now, for some people, the prettier home with the pool in the backyard will be completely justifiable, even if it means little progress towards financial independence and freedom. And that’s COMPLETELY FINE. However, if you’re seeking early retirement, lifestyle inflation guarantees slower results.
Let’s take a quick look at a case study where Joe starts his career at age 22 making $50,000 bucks a year. At age 22, he spends $45,000 of the $50,000 he earned, and has $5,000 leftover to invest. Joe continuously gets a 5% raise every year for the rest of his career until he quits working at age 65. Let’s look at three different scenarios where Joe’s yearly raise stays the same but his spending increases at rates of 1%, 3%, and 5% per year. In each spending scenario, he invests the difference between his income and his spending into retirement accounts that provide a 7% return each year.
5% Increase in spending each year:
- Yields very slow progress on retirement savings
- Spending increase resulted in a final retirement account value of 2.9 million dollars by the age of 65.
3% Increase in spending each year:
- Yields moderate progress on retirement savings
- Spending increase resulted in a final retirement account value of 10.4 million dollars by the age of 65.
1% Increase in spending each year:
- Yields steady- quick progress on retirement savings
- Spending increase resulted in a final retirement account value of 15.1 million dollars by the age of 65.
In fact, if Joe were able to increase his spending by only 1% each year, by age 43 he would be spending $55k per year. At this age, his retirement account would have grown to 1.47 million! This means Joe could quit his job since the returns from his retirement account would cover the cost of living and inflation.
My apologies if I dove a bit too deep into the numbers there…I got a little excited. The message I’m trying to convey is that if you get a raise or a huge windfall, sock some of it away into your investment accounts instead of immediately buying a new liability. If you’re super disciplined, the day that you get a new raise or start making some side income, immediately automate that income into one of your brokerage accounts or apply it directly to the principle on your mortgage, payoff student loans, build up the emergency fund. The possibilities are endless! Immediately diverting it away from your checking account saves you from the temptation of buying the newest high-tech toaster with an embedded speaker system.
Instead of Trying to Buy Happiness, Invest for Freedom, and Focus On What Really Does Lead to Happiness
I’ve bought some expensive things in my life. My home, computer, car, handgun and a bunch of other schtufff. These things are cool, especially my computer! However, none of these things make my life much more fulfilling. Some of the things that make my life more fulfilling and give me all the feels are:
- new experiences and overcoming challenges
- bettering your physical and mental health
- personal growth
- relationships with my fiancé, family, friends, etc.
- progression and striving to reach goals
- mastering new skills
- having a positive impact in the community or someone else’s life
- What do you find to be fulfilling?
I’m not saying that money can’t help to enable some forms of happiness. Sure, you’ll likely need a little money to travel and fund your hobbies. But sometimes we buy things to fill a void or to make us feel happy (retail therapy) and the feeling of happiness can be quite short lived.
Thanks for reading friends. Let us know in the comments how you combat lifestyle inflation throughout your journey to financial independence!