Lifestyle inflation is the increase in spending when your income goes up. For example each time you get a raise. It is extremely tempting to start spending more if you have more. You can go out more often, travel more, upgrade your hotel room, get that even flatter flat-screen and exchange your old, but functional, car for a shiny new one. All things that give you short-term pleasure.
But the more you inflate your lifestyle, the more difficult it will be to get out of debt and the higher the risk you’ll lose sight of your longer term financial goals. If you love the rat race you are currently in, then inflating your lifestyle is a surefire way to keep you there.
You’re not inflating your lifestyle each time you spend more money as some increases are inevitable of course. But this is about the difference between needs and wants. Needs are necessary – like food, water and shelter and a whole range of other things – but wants are merely things you desire. Jewelry, entertainment, electronic gadgets, holidays.
It is important to enjoy life today and not wait for tomorrow. You may not be around by then. This is the reason why I do spend money on wants. Like road trips for example. They’re not strictly necessary, but I wouldn’t want to give up on them. Not even my desire for FIRE is getting in the way of me and my brother camping above the Arctic circle and freeze our butts off (I know that doesn’t sound tempting, but for us it is).
Aiming for FIRE is a balancing act as the key to reaching your financial goals is to make sure you’re wisely balancing your long-term needs and your short-term wants.
That isn’t always easy.
We live in a time of materialism. We have been hard-wired to consume and we consume to construct and maintain our identities. The ads tells us we ‘deserve’ their product or service. We are what we buy, wear, drive, watch, live in and listen to.
It’s scary that consumption plays such a central role in our lives. That we’ve come to a point where many feel our lives would be devoid of meaning if we couldn’t get what we desire.
So what about me?
Well, first of all I am notoriously bad at tracking my expenses. I don’t always know where my money goes. Some may say that tracking expenses is key when aiming for FIRE, but I approach it differently. For the most part I automate my savings/investments. A fixed amount. The rest is for paying the bills, food and everything else. I am in the lucky position that I can afford this laid back attitude.
But under the surface lures the lifestyle inflation monster. If I don’t really keep track and all I know is that I invest a fixed amount, it may catch me and drag me to down.
It may not matter that much if I think that the fixed amount I invest is more than enough. But the thing is that I want to reach FIRE rather sooner than later. So the more I can invest the better (provided I can also have some fun today).
But it is my desire for FIRE that helps me to fight lifestyle inflation. Ever since I started the journey I’ve become more conscious about my spending. I really try to avoid wasteful, unnecessary spending and to spend less on things that don’t matter (to me). It is an exercise in self-constraint: To refrain from ‘automatically’ spending my money just because I see a shiny new thing that I have to have.
But how do I determine what to spend my money on? When is it okay to swipe the plastic and when should I keep it in my wallet?
I have some questions to guide me for when I’m confronted with a want (and I feel tempted because I have the money):
- Is it a thing or an experience?
- Is it for entertainment only or something that fixes a problem/can be used constructively?
- Do I already have a similar thing/have I already experienced something similar?
- Is it an investment in a relationship/friendship?
- Does an alternative, cheaper option exist?
As well as my key values:
- I value experiences more than things
- I rather invest in relationships/friendships than something else
- I rather spend on things that fix a problem and/or can be used constructively than entertainment
- If two things have similar quality/functionality I choose the cheaper option
- I am not at all obsessed with brands
- I don’t borrow money unless it makes sense (financially)
Let’s put the above to the test.
For example, I was considering to get an HBO subscription.
- Is it a thing or an experience? It is more a thing than an experience
- Is it for entertainment only or something that fixes a problem/can be used constructively? Entertainment only
- Do I already have a similar thing/have I already experienced something similar? I have Netflix
- Is it an investment in a relationship/friendship? No
- Does an alternative, cheaper option exist? Yes and no. Can’t see the same shows elsewhere. On the other hand, if I wait long enough I can get DVD’s for a few bucks.
Verdict? This is an absolute no go. Even though I cannot watch the HBO shows elsewhere, it is entertainment only, has nothing to do with friendships/relationships. And on top of that I already have Netflix to keep me entertained.
Having said that, I would maybe signup for the free 1-month trial, binge watch whatever I am interested in and cancel the subscription again.
Let’s try one more. What about visiting a famous, high-end restaurant with a good friend?
- Is it a thing or an experience? An experience
- Is it for entertainment only or something that fixes a problem/can be used constructively? Both. I need to eat. It is also a form of entertainment to be served quality food in a fancy setting.
- Do I already have a similar thing/have I already experienced something similar? I have been going out with the same friend before, but that was long ago.
- Is it an investment in a relationship/friendship? Yes
- Does an alternative, cheaper option exist? Yes. There are many cheaper restaurants.
I would definitely spend money on this! But I may question the high-end restaurant if the only reason to visit would be to collect the scalp ‘I have eaten at such and such’. But as this is about spending time with a friend, I would go for it.
What about a road trip with my brother next year?
Same thing as the above. It’s an experience, it’s about bonding with my brother. We’ll keep it as low cost as possible, but we’ll definitely hit the road.
The old flat-screen broke. Shall I buy a new and bigger one? Probably not (immediately). It’s a thing, mostly used for entertainment, I have a computer that can stream the same shows (which is the cheaper option at the same time) and it has nothing to do with friendships/relationships.
An expensive new watch? No.
A trip to Rome (where I have always wanted to go)? Yes.
New (formal) shoes because I have worn out my one and only pair? Yes.
It’s so trivial, but these simple questions, paired with my values, keep me pretty grounded and help me to avoid (or at least limit) lifestyle inflation. There is still a risk though as I may start spending more on experiences, like going out with friends, travel to exotic destinations, etc.
The best thing to do here is to increase my automated investment amount whenever my discretionary income increases. In other words, try keeping my discretionary income stable over time.
How about you?
What are your thoughts?
What do you do to avoid lifestyle inflation? If anything at all.