Introduction
In this article I am going to talk to you about a concept that is familiar to many and still completely unfamiliar to many others: lifestyle inflation. What does it mean? Why is it essential to know about it? What can I do to combat it? I will try to answer all these questions and give my own insight into it in the next few lines. Enjoy!
The typical scenario
A young saver, just entering the working world, plans to save a certain amount of money in his first year as a wage earner and an even higher amount in the second and so on. This sounds like a rational and even sensible plan, doesn’t it? Yet after a year of savings, to the now former student with a year’s career behind him, the old apartment shared with two other friends no longer fits; he wants a 3-room by himself, perhaps close to downtown and the office. He also redoes his wardrobe, goes out at night almost all the time, prefers not to cook at home but to buy take-out food, enjoys his twelve annual vacations, and decides to change his car not because it’s broken but simply old, taking a car he couldn’t buy, on lease.
The one just described is the type of scenario that is called “Lifestyle Inflation.”
Definition
The phenomenon described occurs when a person as his salary increases, increases his expenses. These expenses, let’s be clear, are not those that are essential for living, which yes increase due to inflation, but are well more than compensated for by the increase in salary year after year, instead they are incidental expenses that in most cases are unnecessary, such as precisely newer apartments, higher-end cars, clothes, consumer electronics, vacations, ec.
How to fight it
So what should a young (or not so young) saver do to avoid falling into this trap? Very simple: have the right mindset. Big super-detailed savings plans, listing where one’s savings should be invested in an almost maniacal manner, only serve to make one feel secure, but they are rarely followed to the letter. However, it is true that it is important to have a direction where one wants to go. Going back to the right mindset, to describe it well I could imagine that I have the perfect saver in front of me and describe him or her: a person who does not care about the social status game, who is not swayed by the false appearances of social media, who makes do with little but does not live miserable because of it, uses money sparingly only for what really makes him or her feel happy, while the rest that is left over he or she automatically invests in passive index funds after building a small emergency fund to sleep sound dreams. There, now think about following this example for 40 years or even 20 years, you will be in a much better situation than most people.
A very common evil
Don’t think that the “Lifestyle Inflation” only affects those with honest jobs, this phenomenon also greatly affects the so-called white-collar workers, where, again to impress people who really don’t give a damn, managers or established employees live paycheck after paycheck, always reaching the limit at the end of the month to finally be able to catch a breath of air. This is a very sad thing, isn’t it? People with 200k-300k salaries who could retire at 45-50 years old but continue to increase their lifestyle just to emulate what some colleagues or “friends” around them are doing. These people who are established in their field, brilliant, ready to work even 60 hours a week for that important project that absolutely must be finished by that arbitrarily predetermined date in advance, fail to see themselves from the outside and understand that the real, single, great asset a truly wealthy person has is not the new car or the Valentino suit or the vacation to St. Moritz but time.
A simple mental trick to avoid falling into the trap
I am almost completely certain that if these kinds of people every time they made a purchase rather then seeing a price tag, they would see how much time under their control they have just lost, they would instantly change the way they spend money. Because that’s the point, dear reader: either you spend money to have a life as a “rich person” who continues to have grits at work, stress, lack of sleep and little time to devote to your personal projects or passions until retirement or you can have the life as a humble but never unhappy or miserable person who will still be able to enjoy life when he or she retires.
Money and time
If you haven’t figured out exactly how being an ant and not a grasshopper helps you take more control of your life, I’ll gladly explain it here.
I’ll drop the bombshell right away: a person who manages to save 2,500 a month (30,000 a year) and invests it every year, in 25 years he can retire with a monthly annuity of 4,000 a month, without ever affecting his wealth, that is, he can live only on interest. This means that for a 25-year-old who gets used to having little and manages from the start to save that amount, by the time he is 50 years old he can already enjoy a pension for life, without even thinking about what he will be given by the government (assuming something comes along, thank you boomers). Isn’t that outstanding? And you know what? If you save more and therefore invest more you go into retirement even earlier. This is compound interest. Note that I am talking about 25 years, not 5, and it would be even greater compounding (asset growth) if the time horizon were longer, maybe 40 years. But virtually no one wants to retire at 65 with several million; we all want to still be decently fit to enjoy the money.
Conclusion
In this short article we talked about what lifestyle inflation is: who it affects, the right mindset not to fall trap of it, and finally how to completely turn your spending habits around, using the time comparison. I hope this article helps you not to fall into the trap of lifestyle inflation and has opened up a new way of looking at your relationship with money and how best to use it. See you in the next article, see you soon!
