031 | Is Lifestyle Inflation Stealing Your Freedom?

It’s so common for people to spend more as they make more. This is called lifestyle inflation, and it’s the main reason so many lawyers live paycheck to paycheck.

Left unchecked, lifestyle inflation will block any chance you have of becoming financially independent and getting the control of your time you’re seeking.

In this episode, we’ll talk more about what lifestyle inflation is, why it’s such a problem, and how to avoid it.

Lightly edited transcript appears after the show notes.

Topics Discussed

• what lifestyle inflation is
• why lifestyle inflation is a problem
• how to avoid lifestyle inflation

Listen to the Episode

Resources mentioned

Lifestyle Freedom Starter Guide

The Millionaire Next Door by Thomas J. Stanley, Ph.D. and William D. Danko, Ph.D.

Episode 7: Budgeting for Lifestyle Freedom and Financial Independence

Episode 17: How to Budget Using the Zero-Based Budgeting Method for Lawyers

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Lightly Edited Transcript

Hey friend. Happy Friday!

Welcome back to Wealthyesque. How are you?

I hope you had an amazing week. My week was…it was okay. It was kind of long. It felt really long. I don’t know why, but it did.

I am looking forward to the weekend, but I’m also looking forward to the conversation we’re going to have today.

So today we’re talking about a concept known as lifestyle inflation. And we’ve talked before about how 25% of households bringing in $150,000 or more live paycheck to paycheck.

We’re going to talk today about the main reason why this happens with many high income earners, which is lifestyle inflation.

I love the book The Millionaire Next Door because in it, the author talks about how often the people who look wealthy by society’s standards don’t have any wealth because they spend all their money on the things that make them look wealthy.

And meanwhile, you’d never know from looking at many people who are actually wealthy that they were wealthy because they don’t spend their money on things that we traditionally look at as status symbols or symbols of wealth.

If you want control of your time, you want financial independence, lifestyle freedom, all the things, then you’ve got to watch out for this because it can really sneak up on you.

So what is lifestyle inflation?

Lifestyle inflation is the tendency that people have to increase their spending as they make more money. So you get a raise, and you upgrade your car, and then you get another raise and maybe you get a nicer apartment or a bigger house, or you start going to nicer restaurants or whatever, right?

And we all engage in some level of lifestyle inflation, especially as we experience life events like getting married or, you know, having kids, buying a house, that kind of thing.

But one way you can look at whether your lifestyle inflation may be going a bit too far is if you think back to a time when you made less money. And you thought that if you could just get to the income you’re at now then things would be great, right?

I often use the example of being in law school. Like, when you were in law school, chances are you didn’t make anywhere near what you’re making now if you made anything at all.

And you couldn’t wait to get just to your entry level salary, and you thought that you’d have it made and everything would be wonderful.

But now, you feel like your current salary isn’t enough, and if you made just a little bit more then things would be better.

Well let me tell you: they won’t be better because it’s not the money. It’s the lifestyle inflation, and if you don’t get things in check, then you’ll keep making more, but you’ll keep spending more and you’ll keep staying in the same place.

So we’ve gotten into it a little bit already but why is lifestyle inflation a problem?

We’ve talked before about minding the gap and that is the difference between your income and expenses, which is how you build wealth.

If you keep increasing your spending every time your income increases, then you’re not growing that gap.

The size of the gap also impacts your savings rate. If you’re trying to reach financial independence—that point at which you no longer have to actively work for money to cover your expenses—then your savings rate is the biggest factor.

The more you’re able to save, the less you need to live on, and the less you need to be financially independent, and the faster you get there because you’re able to invest more money.

But when you keep inflating your lifestyle, then you’re not growing that gap between your income and your expenses, and you have less money available to invest and build toward financial independence and taking control of your time.

So how do we prevent lifestyle inflation from happening?

The first tip I have is to get really clear on what you value. And since you’re listening to this show, then I know you value your time.

You want more freedom in your life, and one of the biggest things that robs people of the freedom they want that control of their time is stuff.

That’s not to say that you shouldn’t buy things. I just encourage you to get really clear on the things that actually bring you joy. Spend on those things.

So, one example for me is, I really enjoy fashion and beauty products and things like that, so I spend on those things, although maybe not so much in the last year or so. But generally, those are things that I’m willing to spend on because I value them.

My husband loves cars, and we’re not getting a new car every year or anything like that, although I’m sure he would love it. But when it was time to upgrade his car like after we had our second kid, we wanted to get a bigger car because my husband was driving a coupe at the time.

He’d had it for quite a while. It was like a 2008, so it was like 10, 11 years old, and he wanted to get something a little nicer and so we ended up getting an Infiniti SUV.

It wasn’t brand new. It was two or three years old, and so that cut the price down significantly, but he really values car so that’s something that we were willing to spend on.

Similarly, for his 30th birthday, I took him to the Porsche Experience Center here in Atlanta, and we drove two of the cars with one of their instructors, and it wasn’t cheap, but again it’s something I knew would make him really happy because he values cars so much. Like he really enjoys cars.

So think about what you truly value spend on those things, but the stuff that you don’t care about that you’re just spending on because your neighbor’s doing it or your co-workers, or you know whatever cut that stuff out.

Spend on the stuff you care about. Cut the stuff you don’t.

The second tip is to get on a budget. Track your spending. Make a spending plan, whatever you want to call it.

If you don’t have a budget, then I bet you’re spending more on things than you think you are. I started to say “I 100% guarantee it” but I was like, “No, I’m not gonna do that.” The lawyer in me would not let me say that.

But I bet that you’re spending more on things than you think you are, and I see it all the time.

People come to me for help with their money, and they think they’re spending X on groceries or eating out or Amazon or whatever, but it always ends up being more like 2x, right? They’re spending double what they actually think they’re spending.

And so, I want you to go back through your spending for the last three months or so and average your spending in each category so you get a good idea of where you’re starting from, and you can download the template for the budget that I actually use for my family at rhothomas.com/budget.

But once you get that, make sure that your spending aligns with what you value. So once you get those averages for the last three months, look at your spending in each of these categories.

Go back and look at when we talked about your values. Look at whether the things you’re spending on are things that you actually care about. And if they’re not, then you can make changes from there.

Head back to episodes 7 and 17, where I dive deeper on budgeting and how to do the budgeting method, I recommend which is the zero-based budget.

But anyway, a couple of things that I will say here though is number one, make sure you budget in money for fun, and number two, if you’re budgeting with a partner, then you might try giving each person a set amount of money that they can spend no questions asked each month.

I’ve found that that’s cut down on a lot of the fights that my husband and I were having early on in our marriage, and it cuts down on money fights with my clients and their spouses as well.

I give these two tips because I noticed that a lot of times when people are trying to budget, they try to get really strict and they want to cut out all of the fun things, but when you are budgeting and it feels like deprivation, then you’re not going to stick with it. So that’s why I tell you to make sure that you have that money in there for fun.

Whether that’s fun, you know, as a family and then each person having their fun money individually, make sure that you account for fun.

And then the last tip I have is to make sure you’re being intentional with any raises or bonuses or windfalls, things like that.

One benefit of getting on a budget is that you can see exactly how much you’re bringing in each month and exactly how much is going out.

We use raises bonuses and windfalls for our debt, which is our primary financial goal right now. We generally continue to live on the same amount, even when we get a raise, and early on we would actually calculate the difference between our take home pay after a raise and our take home pay when we first started our debt freedom journey because we wanted to make sure we were putting all of the extra, all of the new amount toward our debt.

We don’t quite get like so into the weeds these days, but that was a really good way for us to stay on track and make sure that we weren’t inflating our lifestyle. We weren’t spending that extra money from the raise.

Any bonuses we get go almost entirely to our debt and, you know, sometimes we might take a little bit and splurge but the bulk of it goes toward our financial goals.

And another thing we do—and I am by no means telling you to do this. Be warned I’m not a tax professional. My accountant friends are horrified that we do this, but we purposefully get a healthy tax refund each year.

And maybe I’ll do an episode like diving deeper on it, but we don’t claim any exemptions, and we have the most amount taken out of our check, so then come refund time, we have a big chunk of money coming to us, which we then are able to put towards our goals.

The first two years we did it, that money went straight into the down payment fund for our house, and then since then it’s gone straight to paying off debt, although, like with the bonuses, we might take a little bit and splurge here and there.

The idea behind it is when we have a little extra in each paycheck, then it’s easier to spend it mindlessly than when you get a large lump sum at once. So, you know, you’re going to be a little bit more careful with what you do with a large lump sum of money.

And again, I’m not a tax professional. I’m not telling you to do this. My accountant friends hate that we do it, but that’s what we do. And I think I’ve sufficiently disclaimered—if that’s a word—disclaimed, warned you about the statements that I made about our tax refund, but I thought I’d share that with you because it is one way that we keep our income artificially low, and that we make sure that we’re not falling into that lifestyle inflation trap, and are able to stay on track with our goals.

Ultimately, the key takeaway in all of this is, the more money you spend on stuff, the less money you have available to buy back your time, and time is our most finite resource. Once it’s gone, we can never get it back.

So if you need help mapping out your plan to buy back your time, I can help you. Head to rhothomas.com/coaching. Let’s set up a call and chat about your situation and how coaching can help.

Alright so let’s recap:

1. Many people who look wealthy don’t have wealth, and many people who are actually wealthy don’t look it.

2. Lifestyle inflation is the tendency we have to spend more money as we make more money. We all engage in lifestyle inflation to an extent, but left unchecked, it will keep you stuck in the same place.

3. Lifestyle inflation hinders your ability to build wealth and reach financial independence. Your expenses are higher so you need more to be financially independent, but you have less money available to invest.

4. A few tips for preventing lifestyle inflation: get very clear on what you value; get on a budget and track your spending; and be intentional with how you handle raises bonuses and windfalls.

Okay, so that’s it for today’s episode. Come on over to our private Facebook community The Wealthyesque Community, and let’s talk more about lifestyle freedom. I’d love to know your thoughts about it. You can find us at rhothomas.com/community.

If you got value from today’s episode, please share it with a friend who you think may also enjoy it. And if you share on social media or you just want to connect my handle is @iamrhothomas. I am most active on Instagram, although you can find me a few other places as well.

If you haven’t already please subscribe to the podcast, and leave a review. The reviews help the show get seen by more people so we can spread this message, and I read every one. I love hearing what you guys are getting out of the show. Or I guess reading what you guys are getting out of the show.

Okay, friend, as we close out, I pray that you will take some time to consider the cost of your lifestyle, and if you want to keep going down the path you’re on.

I pray that if you are struggling or feeling confused about how to get control of your money that you will find help, whether that’s with me, with another coach, with someone in your life who is good with money.

And as always, I pray that you will continue to take steps to regain control of your time, build wealth, and live the life of freedom and choice you deserve.

Talk to you later.