The Most Dangerous Threat to Financial Independence
I earned my Bachelor’s degree when I was 26 years old in 2006. That was when I started working full-time again at a non-profit organization. They started me at $15/hour. It wasn’t high, but it was a good start.
I then pursued my Master’s degree a year later and earned it in 2010. I became a college counselor with a starting salary that almost quadrupled my pre-grad days. I was moving up.
With an amazing new salary, I bought a new MacBook Air. And a bunch of new shoes too. My girlfriend and I also moved to an apartment instead of renting a $500/month room. In fact, in 2011, we moved to a luxury apartment in Sunnyvale, right in the middle of the Silicon Valley.
With my wife’s registered nurse salary and my college counselor salary, we joined the middle class. We became newly minted 6 figure earners! And we were burning cash like it’s nothing.
You see, when you make a lot of money, you start eating out a lot. You also charge all kinds of shit on your credit cards, because—supposedly—you can afford it. That’s exactly what happened to us. We ate out often, traveled to the Philippines often, and bought all kinds of things… often.
In 2014, I ran 12 half marathons at approximately $100 per race. In 2015, we bought a small Bay Area home for $433,000. We then got married and spent over $30,000 for the wedding. And In 2017, we decided to go to France, Spain, and Turkey for our long overdue honeymoon.
If not for the incessant warning of my parents to be mindful of our spending habits, we would have probably wasted more money. Luckily mom was breathing down my neck telling me to slow down.
What happened to us is called lifestyle inflation and it’s the most dangerous threat to financial independence. Lifestyle inflation can derail anyone building financial security. In fact, it will sabotage anyone’s plan to retire.
If you are an immigrant, or someone who comes from a low socioeconomic background, the impact of lifestyle inflation is even worst. When you start achieving your goals and move up in the economic ladder, you can afford stuff you’ve only dreamt of. Lifestyle inflation creeps into your soul and destroys your hopes and dreams of a secure future.
So what is lifestyle inflation? According to the finance resource site investopedia.com: “Lifestyle inflation refers to an increase in spending when an individual’s income goes up. Lifestyle inflation tends to become greater every time an individual gets a raise and can make it difficult to get out of debt, save for retirement or meet other big-picture financial goals.”
Lifestyle inflation is what’s preventing hundreds and thousands of Filipinos from increasing their net worth. It’s the main culprit that puts people into perpetual debt. They might feel rich, but they are net worth negative due to reckless spending habits.
The Turning Point
My wife got pregnant soon after we came back from our European vacation. In 2018 our son Gabriel was born. Naturally (LoL), I bought a brand new Subaru Forester (lifestyle inflation continues). It may not have been the smartest move, but since Subaru is one of the safest cars, I guess it was somewhat smart.
One stressful day, I went for a long runs and by chance listened to Tim Ferriss’s interview of Pete Adeney aka Mr. Money Mustache. I was amazed by what Pete was able to accomplish. His annual expenses is only $25,000. He retired at 30 years old. How can that be?
I started reading Pete’s blog www.mrmoneymustach.com. From there, I was introduced to Jim Collin’s Stock Series, a series of life changing finance articles. I devoured them all. Then I learned about Kristy and Bryce from Millennial Revolution and completed their free investment workshop in 3 days. I bought JL Collin’s book and Kristy and Bryce’s book and my life was never the same. I was introduced to the FIRE movement.
My wife and I are very frugal now. Our monthly household expense is less than 50% of our combined salary. Our student loans are almost paid off. We look forward to increasing our tax-advantaged retirement contributions and also our index stock purchases in our brokerage accounts (we prefer Vanguard).
We are on track to financial independence in less than 10 years.
What has been your experience with lifestyle inflation? Are you aware of it? How will you tackle this phenomenon in your life?