Lifestyle Inflation is Bad, but…
Is lifestyle inflation really bad? My initial response is yes, but… upon further reflection, I realized that I have, in fact, inflated my lifestyle in the past and present. I have engaged in controlled lifestyle inflation.
Improving your life whether buying a car, buying a bigger house to support a growing family, or upgrading to a new laptop to support your thriving online business is, by definition, lifestyle inflation. But it actually make sense to do so. The return of investment—in time, energy, love, and income—can worth the cost.
Another reason to engage in controlled lifestyle inflation is to enjoy the fruits of your labor. Give yourself a reward for all your hard work.By all means, treat yourself! Buy a new pair of jeans, a new pair of shoes, even that Nintendo switch if you’d like. If you have some extra income coming in enjoy it.
If your goal is Financial Independence (FI), however, and you want retire earlier than 65, then you cannot afford to inflate your lifestyle too much. You have to be mindful of what you’re spending because that affects your FI goals.
How do you know if you’ve gone too far? Is there a right balance between being frugal and buying stuff?
Rules to Live By
To be financially independent someday, follow these rules:
- Save up to 50% or more of your monthly income. PERIOD. If you bring home $4,000 per month, your household and personal expenses shouldn’t go beyond $2,000. If you get a promotion and salary raise and start bringing home $4,500/month, you can then spend $2,250.
- Buy things you believe are critical to your wellness, but cut down on other areas, thereby maintaining the same income-expense ratio. For example, if you spend $800 on food, and you want to buy a new pair of shoes that cost $120, cut your food expenses to $680 for that month so you can buy the $120 shoes.
- If you want to inflate your lifestyle for a better living condition/experience such as living in a more luxurious apartment, well then increase your income through side hustles or overtime work.
Why Save 50% of Your Salary
Two very powerful reasons why you should do it:
- If you want to achieve FIRE, 50% allows you to save more and take advantage of compounding, therefore reaching your FI number faster. If you save and invest $24,000 per year in VTI ( average growth is 8% annually) your investment will gain $1,920 as opposed to only $960 if you only saved half ($12,000).
- If you can live on only 50% of your salary, you can achieve FI with a smaller small. If you’re able to live on $20,000/year, using the 4% withdrawal rate (or 25x your annual expenses), you only need $500,000 in order to start withdrawing 4% or $20,000 each year to fund your life. In contrast, if you have a $40,000/year lifestyle, you’ll need $1,000,000 to start withdrawing 4% ($40,000).
If saving 50% of your salary is not possible due to high living expenses, then either (1) increase your income, (2) cut down on expenses, or (3) forget dreaming about early retirement.
Which one are you willing to sacrifice?
Are you willing to make sacrifices now in order to earn your freedom of time and money in the near future? What can you do right now to slow down your lifestyle inflation? What side hustle can you start to make extra money? Please leave a comment below.