My wife and I are currently in the market for a new house. We have plenty of money saved, have a high household income, and after a decade of living well below our means, we think we’re ready to start inflating our lifestyle a bit more (or a lot more if we’re being real). I’m not talking about buying Teslas or a boat or anything crazy like that. But getting a nice house for our family – that’s something we’d like to have at this point in our life.
Of course, I’m nervous about making such a big change to our lifestyle. We only pay $882 per month for our mortgage right now, which is laughably low when you think about what most people pay for housing and what our household income is. Our biggest monthly expense at the moment is our son’s daycare, which while expensive, doesn’t hurt our bank account very much considering how low our other expenses are. With such low fixed expenses, I’ve always felt like I’m in a position where I can do anything I want.
The type of houses we’re looking at, however, will likely triple or quadruple our monthly housing costs. And when you include the higher maintenance costs and property taxes that we’ll end up paying, it means a massive increase in our fixed yearly expenses.
This is lifestyle inflation – all of us, no matter who are, tend to spend more money as we make more money. You might inflate your lifestyle more or less than others, but it will inevitably happen.
There’s one thing I’ve noticed though. As you save money, at some point, you can reach a level where your money, by itself, will continue to grow to absurd amounts – even if you don’t save another penny ever again. This is commonly referred to as Coast FIRE. It’s a turning point in our financial lives. And when you get to that point, things get much easier.
The Math Behind Coast FIRE
I’ve written about what Coast FIRE is in another post, but the short of it is that Coast FIRE is a point in your savings lifetime where the amount of money you’ve saved will grow into enough money to support your lifestyle at traditional retirement age, even in the unlikely event that you never save any money ever again. You can think of it as a tipping point in your saving and investing journey.
For example, if you’ve managed to save $200,000 by the time you’re 30 years old, you put yourself in a wonderful position. Even if you never save another dollar for the rest of your life, by the time you’re 65 years old, that $200,000 will likely grow to over $2 million. And every $100,000 more you have saved by the time you’re 30 essentially increases what you’ll have by $1 million.
Three things make Coast FIRE work:
- Compound Interest
- A Large Amount of Money Already Saved
Time is fairly self-explanatory. The more time you have, the longer you have for the money you’ve saved to continue to grow. This is why it’s so important to save as much as you can early in your investing lifetime.
Compound interest works by taking advantage of time. In the early days, compound interest doesn’t do much. But as more time passes, your money continues to grow and get larger. And the bigger your nest egg is, the more impact compound interest has. By the time you get into the later stages of your life, your money will grow in huge amounts simply because of how much money you already have.
This brings us to the final thing you need – a large amount of money already saved. If you can save enough money early in your life, it’s almost inevitable that you’ll have a large sum of money in the future. That’s of course easier said than done. Getting to several hundred thousand dollars by the time you’re in your early 30s isn’t easy. You need a good income. And you need low expenses. Both of these things are often difficult to find in those early days of your career. But if you can figure this part out, don’t waste it – it’s all too common to see people with high incomes walk into their 30s with nothing.
Coast FIRE Allows You To Take Chances
As much as I like to think I know what my yearly expenses will be for the rest of my life, the truth is, I really don’t know. Life is way too complicated for someone as young as I am to know what my yearly expenses will be a few years from now, let alone decades from now.
Because the future is so unknown, it’s really important to have backup plans in place. That’s why I keep a sizeable emergency fund and recommend everyone do the same. And when I quit my job to write and side hustle full-time, I wrote down several backup plans for myself just in case I realized I couldn’t make this self-employment thing work.
In a way, Coast FIRE is the backup plan of all backup plans. It puts you in a position where you still have to earn income, but you also put yourself in a position where you can save less if you need to. If you reduce your savings one year or miss out on saving completely for whatever reason, it won’t ruin you.
Importantly, Coast FIRE puts you in a position where you can take chances with the things you choose to do with your life. I made the move to self-employment specifically because I’d set aside enough money that I felt comfortable with my future, even if I didn’t save very much money for an extended period of time. Buying a much more expensive house is also made more comforting by the fact that I’ve already saved a lot of money – enough that I’ll likely have millions when I’m in my 60s, even if I never save another dime again.
Hitting that magic Coast FIRE number allows you to take chances. It can even allow you to inflate your lifestyle with a bit more confidence. When you have a backup plan like Coast FIRE in place, life becomes much easier.
Lifestyle Inflation Will Happen – Try To Hit Coast FIRE First
There’s no doubt about it – lifestyle inflation is going to happen. I think one thing my wife and I did right was to try to delay it for as long as we could. For our 20s and early 30s, we lived fairly lean. It allowed us to amass a big chunk of savings.
This is advice I would recommend to anyone. Take the early years of your working life and do your best to save as much as you can. Live lean during this time and try to get as much money saved and invested early in your investing life. If you can get $100,000 or more saved by the time you’re in your early 30s, it’ll give you so much more flexibility to try things.
We haven’t found a house yet. The market here is so crazy that I’m starting to second guess whether we’ll ever find a house that’s right for us and that we can actually buy without having to overbid like crazy. But eventually, we will find a house and it will dramatically increase our lifestyle. And even if our housing costs go way up, we’re still in a position where no matter what happens, we’ll likely have enough to support whatever our lifestyle may be in the far-off future.
*Mortgages are an interesting thing to think about too when it comes to how you think about Coast FIRE. By its very definition, if you inflate your lifestyle, you’re no longer going to be at Coast FIRE. But if you have 30 or more years left until traditional retirement age, increasing your housing expenses now might not impact your Coast FIRE number at all. That’s because, in 30 years, you’ll pay off your mortgage. By the time you hit traditional retirement age, you’ll remove the largest monthly expense from your budget – and you’ll be right back at what you hope to spend.