FI's Enemy Number 1: Lifestyle Inflation

Key Takeaways

• Most people start to spend more if they start to earn more. This is what we refer to as lifestyle inflation.

• If you are serious about achieving financial independence, you must start spending less when you start earning more. This way, you increase the gap between earnings and spending. Invest the gap in order to grow your investments, which accelerates your journey to FI.

Baby Steps

• Take a baby step toward spending less. Buy only what sparks joy and improves your life. Find an expense which you can cut. Maybe you have a music or streaming service which you hardly use. Get rid of it. Maybe you often buy more food than you need and end up trashing it. Buy less.

• Read this post and see if there is an idea on earning more which resonates with you.

The Whole Story

Most people simply spend more if they earn more. If they get a raise and bring home more money, they buy a bigger car or a bigger house. Due to this lifestyle inflation, they never have any money left at the end of the month to save or to invest. Therefore, they can hardly ever achieve financial independence. Maybe they cannot even retire at age 65 since they still have to make mortgage payments. If they are able to retire, they will probably rely on social security and, if they ever planned for retirement at all, their 401(k) and individual retirement accounts. What is even worse than spending all earnings is taking on credit card debt and/or personal loans to finance a certain lifestyle which, based on earnings, cannot be afforded. They will end up in a downward spiral paying interest on debt for a long time.

Instead of spending all your earnings each month, you should increase the gap or difference between earnings and spending, by 1) earning more, and 2) spending less over time. Take the difference and invest it, preferably in an S&P 500 mutual fund or ETF. This approach will speed up your journey to financial independence. If you do not immediately find ways to cut expenses, at least keep your expenses flat when you start earning more. But do not start spending more when you start earning more. Do not become a victim of lifestyle inflation. Follow the "FI on Steroids" approach by increasing the gap and investing as much as possible as early as possible.

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