Lifestyle Inflation: A Two-Headed Monster

Two-headed monsterAh, lifestyle inflation.  This is a topic that’s been well-covered by financial bloggers everywhere, and for good reason.  Lifestyle inflation is probably the number one reason that people fail to save money.

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 makes you stop eating ramen and start eating more steak.  It’s what makes you stop shopping at the thrift store, and start shopping at the mall, then your personal tailor.

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.

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.

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 :).

What expense would be the easiest for you to cut from your budget?  What would be the hardest?

Expenses: February 2015
We Bought a House

2 thoughts on “Lifestyle Inflation: A Two-Headed Monster

  1. My budget is cut down pretty slim for me. I really don’t buy a lot of excess stuff (though the past few months have been particularly bad for me)… But either way, I save somewhere over 60% of my income, I’m not exactly sure how much since I guess I’m a bad personal finance blogger :-/

    Anyways, because I save a large percentage, I don’t ever give into lifestyle inflation. If I get a raise, it all goes into savings. Same with my tax returns or anything else. The thing is, if I wanted lifestyle inflation, I could do it any time I wanted. But I’ve already found that I don’t really need more than I have (well that’s a lie, I don’t want roommates, but I haven’t been able to pull the trigger on that yet since it will be a huge increase in expenses).

    But being able to do lifestyle inflation whenever makes it easier for me to not do it. I just make the same decision I have made for the last X number of years…. Not buy things that I know I don’t really need.

    • Zee,

      First of all, I love your blog! Thanks for taking the time to say hello.

      “..being able to do lifestyle inflation whenever makes it easier for me to not do it.” This is definitely true for me as well. Like many things relating to FI, it’s all about having choices.

      It’s a great feeling to be content with your current level of spending (especially when it means saving 60% of income). We are definitely in nice groove right now of spending what I would consider to be a reasonable amount without sacrificing much. And, as you mention, routine makes things way, way easier. If you’ve already been making good decisions, then it’s a lot easier to continue to make them.

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Expenses: February 2015

Here's the first post that lays our expenses bare!  Since I'm a total voyeur for finance, these types of details...