Lifestyle inflation is what happens when you earn more money, and in turn, spend more money. It’s a natural part of life, but one that is often viewed as a negative to wealth building. And it’s true. If your income grows, but you spend all of it, you’ll never be able to build wealth.
In the financial independence world, lifestyle inflation is often viewed as a sort of character flaw. It’s how I thought of it for a long time. Lifestyle inflation only happened to people who were too weak to control their spending urges. The way I saw it, if I was 26 years old and spending $2,000 or $3,000 per month, I should be able to do that for the rest of my life. If I couldn’t, it was because I was too weak and consumeristic.
For most of my 20s and 30s, I kept up with what I viewed as this positive character trait. Even though I made six figures most years, I never increased my spending much from what it was when I was a student. When my wife finished her residency and we saw a dramatic increase in our household income, we still generally kept our spending in the same $2,000 to $3,000 per month range. It wasn’t until we were 34 years old that we finally gave ourselves permission to increase our spending. We spent nearly a decade living dramatically below our means. After so many years of living like students, we finally wanted more.
We bought a house that’s much bigger and nicer than the house we used to live in. It’s in one of the best neighborhoods in the city too. But in turn, our living expenses have gone way up. Lifestyle inflation hit us – and it hit us hard. So what’s this say about me? Was it a weakness of character? Poor values where I value things that don’t really matter? I used to judge people for falling into the lifestyle inflation trap – and here I am doing the same thing. I’m going to have to work a lot harder to pay for all the things we added to our life.
Like most of how I think about life, my views on lifestyle inflation have evolved as I’ve gotten older. I always thought of lifestyle inflation as something that needs to be avoided at all costs. But it doesn’t have to be. It’s going to happen and it’s okay to embrace it. The key is to embrace it on your terms when you’re ready for it.
My History Of Lifestyle Inflation
I’ve lived on a lot less than I’ve earned for most (or all) of my adult life. From age 18 to 26, I was a student and spent as much as a student could – which is to say not very much. I never made more than $20,000 a year during that stretch, so I couldn’t spend much by necessity.
I saw a huge increase in my income when I graduated and started my first job. And yet, even with this huge increase in my income, I still spent about what I spent when I was a student. My share of the rent was never more than $600 or so per month. I didn’t spend much on travel or clothes. I didn’t own a car, so I got everywhere by bike or mass transit. I had one year where I lived in a luxury apartment building and I only did it because I took over someone’s lease after they paid me to take it over.
You might think that moving into our first house was a lifestyle upgrade, but it really wasn’t. Our mortgage payment was less than our rent. Compared to our income, we basically paid nothing – our mortgage was only 3% of our monthly income at one point. We rented out a room on Airbnb too, so most months, we effectively paid nothing to live there. The crazy thing is that the value of our house was less than what we made in an entire year. And even when my wife suggested we upgrade to a better house, I still kept pushing that maybe we could wait it out another 5 or 10 years.
From age 26 to age 34, my wife and I kept pretty much the same lifestyle as we had when we were students. That’s almost a decade of saving money and spending very little relative to what we were making.
Reasons To Delay Lifestyle Inflation
It’s probably extreme to live like a student for nearly a decade. And while you don’t need to go to the extreme that I went through, there are good reasons to consider delaying lifestyle inflation. Consider the following:
When You’re Young, No One Expects You To Have Money. One of the biggest reasons I was able to live so frugally without feeling bad about myself is that there weren’t a lot of expectations about how much money I was supposed to have. Maybe in the old days, there was some pressure to get your life started when you were in your 20s and 30s. But these days, that simply isn’t the case. No one expects a 20-something to have any money. Most people don’t even expect 30-somethings to have any money.
I used this fact to my advantage. Since there was no pressure for me to live large as a 20-something recent graduate, I didn’t feel like I had to upgrade my lifestyle. It made it much easier to keep living like a student. Even now, I could probably continue to live on very little and I wouldn’t feel much pressure to increase my lifestyle. It’s not until you’re older where people start to expect more from you.
Give Yourself A Chance To Reach Coast FI. Coast FI is the point in your savings journey where you’ve saved enough money that your savings, by itself, will grow to a large number by the time you hit traditional retirement age. It’s a powerful position to put yourself in because, theoretically, it means you can use 100% of your income without having to dedicate anything towards your future. Of course, from a practical perspective, anyone who’s saving enough to reach Coast FI is probably the type of person who will keep saving for the rest of their life.
That being said, reaching Coast FI gives you tremendous confidence in your decision-making. I was able to quit my job in 2019, partially because I had saved enough in the previous 6 years to put myself in a Coast FI position. When my wife and I bought our much more expensive house, we did so from a position of strength – we had a lot of money saved already and knew that we’d probably be okay, even if things didn’t work out how we hoped.
I still save a lot of money. But I’m also able to make the decisions I make because I have this backup plan in my pocket. There are obviously no guarantees in life, but having a stash of money set aside early in life is still better than having no money at all. If you can delay your lifestyle inflation for even a little bit and reach a Coast FI position, things get much easier.
It’s Easier To Delay Lifestyle Inflation When You Only Have To Think About Yourself. It’s much easier to live on far less than what you could spend when the only person that you have to answer to is yourself. When I was in my 20s, I was the only person I had to really think about in terms of my lifestyle. If I wanted to live like a student, it didn’t really impact anyone else.
Once you add other people into your life – a partner, kids – things get more complicated. If it was only up to me, I’d probably have been fine living like a student for even longer. Indeed, when we had our first kid, I’d initially thought maybe we could keep living the way we’d been living for another 5 years. But it’s selfish for me to think that I get to make that decision for all of us.
I think a lot of people forget this – that how you choose to spend your money isn’t always your decision. We have other people in our lives that matter. If you’re going to delay lifestyle inflation, you need to do it when you don’t have to think about others at all.
Lifestyle Inflation Isn’t Failure – It’s A Part Of Life
There are good reasons to delay lifestyle inflation for at least a little bit. That’s what I did. But it doesn’t mean you have to live that way forever.
Lifestyle inflation isn’t a character flaw. We get one life. And often, there are more people in our lives than just ourselves. Even if you’re okay living on very little, others important to you might not be. We all have our own values, but it’s not fair to push our values onto others who don’t want them.
I was perfectly happy for a long time living on very little because the only person I really thought about was myself. But as I’ve gotten older, my priorities have changed. I have a family. We make plenty of money. We’ve saved a lot of it too during the years when we were able to live on much less without it impacting our lives.
Lifestyle inflation becomes a problem when you spend far more than you make and don’t save anything. But once you’ve taken care of the things that matter, it’s okay to start spending more. The point of money isn’t to save all of it. In an optimal world, we’d save exactly what we need and spend the rest.
Life has gotten more expensive for me as I enter my mid-30s. Not too long ago, I would have said I’m too weak and I’m valuing the wrong things. Better to live on nothing and give myself the freedom to do whatever I want (so long as it doesn’t cost too much money).
I’m more realistic now. Life can be good even if you’re spending money and have to work to support yourself.
Aaron Dwyer says
Agreed – I wish I could live like I did when I was younger. As you get more dependents (elderly parents / kids / pets / etc) in your life – it’s just not possible. As long as you are aware and keep lifestyle inflation under your control it is what it is.
To combat the lifestyle inflation with your eyes wide open, I think the #1 tool would be your budget. A zero based one preferably.
David @ Filled With Money says
After going through the FIRE journey, I can 100% attest that lifestyle inflation HAS to happen. Otherwise, you feel stuck, I thought I could be OK spending $22,000 for the rest of my life but if the coronavirus pandemic taught me anything, it’s that spending money is a necessary part of life.
After grinding away hard during the week, there has to be something that releases me from the void that is working a 9-5. It’s completely OK to spend more money as time passes.
While there are some people on the bleeding edge of living on $1,000 a month I think most people are happiest when they allow a little lifestyle inflation on the things that bring them joy while holding the line on things that don’t really impact how they feel. At least that was the case with us. We lived a lot better than college students but we also spent a lot less than most people with our income allowing us to meet our financial goals and retire without any financial worries.
Mrs. FCB @financialchainbreakers says
Totally agree, and well said. After being super frugal for many years, we definitely wanted some lifestyle inflation in some categories, while still keeping the rest of our spending more strict. And like another comment noted, COVID has given us a greater appreciation for spending on the things that really matter to us, whatever the cost. It’s okay to loosen up deliberately. Besides, we’re not above tightening our belts again someday if we need to!
I feel like there’s always a balance between being the 100% spartan, minimalist saver vs. the extreme splurger that burns all of their money in buying Herme bags.
It’s hard to quantify what the exact balance is, but I’ve read something a couple days ago where they had the 1% rule of thumb: each year, you get to spend up to 1% of your net worth on luxury goods. I think this is quite reasonable.
There’s also a phase in our lives where we don’t have enough net worth to have 1% of it to be really be able to afford anything. I think in that case, it just simplifies down to the ‘delaying lifestyle inflation’ scenario you had above.