Good Day Prairie FIRE Canada Fans, 1Hey there! Looks like you found my handy dandy side notes. I like to call these my website Easter Eggs. You will see these little numbered footnotes throughout my site. Here you will find some of my deeper (hopefully insightful) thoughts and ideas. I also like to add some additional resources and reference material for those who want to deep dive in an issue. Thanks for clicking and enjoy! <—–click me!
The past two months, the blog has been filled with fun, passion and drama! I’ve posted some really cool, interesting, and insightful discoveries I dug up in my deep dive into the financial independence and connecting with the FIRE (Financial Independence Retire Early) community.
I’ve kept things pretty positive, but there has been something dark and sinister lurking in the back of my mind for the past few months. It’s an insidious ever-present disease that can kill your ability to create wealth. And I hate it!
Thy Name is Lifestyle Inflation
Lifestyle inflation is a dirty word in the personal finance and FIRE community. This is because it can wreak havoc on your plans and goals to reach financial independence 2Financial independence means you have enough wealth to live on without working. Financially independent people have assets that generate income (cash flow) that is at least equal to their expenses. Income you earn without having to work a job is commonly referred to as “passive income” . Many associated lifestyle inflation with “keeping up with the Jones”.3 , but it is much more subtle and insidious than that. I see lifestyle inflation as cultural pressure to spend beyond your means, because you think you can “afford it” or people tell you it is the right or “wise thing” thing to do at a certain stage in life. The funny thing is that we are so well versed in lifestyle inflation that we do this to ourselves and when we submit to lifestyle inflation’s siren call we don’t even know we are doing it.
So What Is Lifestyle Inflation Anyways?
It’s hard to put your finger on what exactly lifestyle inflation looks like, but we have all fallen for it one time or another in our lives, including yours truly. It’s that new car we purchased that we got with dealer financing. It’s the big mortgage we were offered by the bank to buy our “dream home.” It’s that all-inclusive vacation we bought with our year end bonus. These are symptoms of a cultural disease we in the FIRE community call lifestyle inflation.
Milestones & Cultural Pressure
As a society we have these set expectations, norms, narratives and goals that we use as milestones to indicate our right of passage so that we know that we have “made it” in life. The fact is that most of these milestones do little to bring real satisfaction to our lives nor do they build true wealth.
My Top 4 Lifestyle Inflation Mistakes
Still not sure what lifestyle inflation looks like? Not sure how to spot it when you see it? To help you out, I’ve identified 4 concrete examples of lifestyle inflation boobie traps I fell for.
1. Post-Secondary Education
This hits home for me. For many of us, it is expected that everyone goes to university after high school. The formula goes like this: go to university, get good grades, and get a great job. Now don’t get me wrong, a university education is a great investment, but it has to be done with a plan and forethought. I have two undergraduate degrees and an MBA, but to be honest the first degree was a waste of time and money. I went into university with no real plan and wasted 3.5 years coasting by not knowing what I was working towards other than a piece of paper. In total at the time that piece of paper cost just over $18,000 in tuition, and 4 years of my time. My second degree was a different story. I was in my mid 20’s and had a clear idea of what I wanted to do 4My dream job is to be a CEO or Executive Director of a non-profit social enterprise.]. I paid for my second degree by working 30 hours/week and took classes at night. But the reality is that many young people in university will graduate with a huge amount of debt 5In 2016, the average student debt was coming to to $25,000 for Canadians and $30,000 for our cousins down south in the US that will follow them through most of their working lives.
2. My First Real Paying Job
After graduating from university, you are ready to find your first real paying job. You know what I’m talking about. The job where your mom and dad can brag to their friends about. The full-time job with vacation, health insurance, benefits, and a pension. Oh wait, there’s more. Every year, you have the chance to get a raise, maybe a nice bonus, and in some cases, both a bonus and a raise. What?! Dollar dollar bills y’all – drinks are on me!
About 8 months after graduating with my MBA, I was able to secure a permanent gig working for the government as a policy analyst. At this point in my life, I was making the most money ever in my life. I felt my hard work at school and biding my time at entry level positions had paid off. That’s when lifestyle inflation raised its ugly head. The first thing that got me off track was that my frugal student mindset went out the window. I had money, so I could afford to not budget, move into a bigger place and not have a roommate. This seriously hurt my ability to have savings and invest for retirement. I did the bare minimum when it came to putting money aside and saving for retirement. I was young and retirement was a far off abstract thing way off in the future. Looking back, I should have kept the student mindset and lived simply. Alas, hindsight is 20/20.
3. Marriage – Taking the Leap
Love is blind… it can also be expensive. During the courting stage, we all want to put our best foot forward. We dress well, go out on dates and heck, if it is serious, it could lead to living together and perhaps the “M” word – marriage. Now, I do not think I am saying anything new when I say weddings are a money pit. Guess what? My wife and I were no exception. We spent over $15,000 on wedding rings, arrangements, hall bookings, decorations, and clothes. Looking back, I shake my head and wonder what could have been done if we had taken just half and invested that money 6Actually I do know. That $7,000 would have more than doubled during that time to $15088.36 if I simply invested it into a S&P Index fund. Gutted! If you like torturing yourself on what could have been check out this calculator here. . The truth is Canadians are spending on average $30,000 on weddings. This is a rather costly sum for just one “magical” day. If you are about to get married or thinking about it, it’s probably best to set yourself a reasonable budget you can afford and avoid going into debt. After all the wedding is the beginning of the marriage journey, and not the final destination.
Check out this video for a humorous and historical account on how weddings are a total rip-off:
4. Buying My First Home – Too Much & Too Early
So you know that cute and not-so-innocent rhyme. First comes love, then comes marriage, then come mom and dad with the baby carriage. It’s the natural progression for many of us on this planet and it is a very good thing. But soon after you are married and start planning a family, your family and friends ask you “why are you still renting? You should really buy a home and start a family.” Or “buying a house is a great investment and you should not be throwing your money away paying for someone else’s mortgage.” The pressure to buy your dream home is immense and many two-income families make the mistake of buying a home (or taking on a mortgage) that eats up most of their income. Both my wife and I owned our own homes before we got married. I had a modest three-bedroom bungalow in a less-than-desirable part of town, while my wife owned a condo at the edge of the city. We sold my home and bought a quaint, vintage 1926 home and kept and rented out my wife’s condo. We thought we were being smart, but it was probably the most expensive mistake we’ve ever made. First, that vintage home needed a lot of upgrades (roof repairs, new furnace/ducts, updated bathroom, etc.). Needless to say, it cost us a pretty penny. Second, the condo was not worth much on the market. It only helped with making payments toward our debt. What would have been a smarter move was to sell my home, pay off the condo from the sale of my house, and live in the condo mortgage free. This would have produced a savings of $10,900 per year and put that savings towards a large down payment on a larger home when needed 7This number is probably larger, because utilities/taxes/insurance are much cheaper for a condo, which creates even greater saving. Also, the sale of the condo could have contributed to the down payment. . The lesson here is that purchasing a home should not be taken lightly. The pressure to own your own home is strong in our society and to resist or question home ownership is to be considered sacrilege in some people’s opinion..
It’s Time to Kill Lifestyle Inflation
Do you recognize yourself in some of the mistakes I made? Or maybe you are feeling the pressure or temptation to upgrade your lifestyle or make a big splash to let everyone know you’ve made it in life. Well hopefully this post has given you second thoughts about your way of thinking and take steps to eliminate lifestyle inflation from your life8 Or even better, you are just starting out and you are able to totally avoid the mistakes I made entirely. . The reason I am writing this post is that I want to KILL lifestyle inflation for everyone. Lifestyle Inflation is one of the biggest barriers for the average person to grow wealth and can prevent you from reaching your financial goals 9 So much so, it has put our entire economy at risk. As I type this, Canadian households are spending $1.68 for every $1 they earn! If that does not make you worry about our society, I do not know what will. .
So What Now?
I want to give you the tools and means to master the art of FIRE. So here are some tangible steps:
Build your knowledge and confidence
Check out three of my favourite books that helped me on my path to FI:
Get to Know the FIRE Community and Connect
I really believe in connecting with the wisdom of the community. Do yourself a favour and have a read of one of my favourite posts: We Are Desperate from Community. There you will get a better understanding of why I think joining a community will boost your chances of success and help you on your path to financial freedom. You will also find a list of online communities and helpful resource. Finally, check out my Five Personas of FIRE and discover which path to financial independence best suits your personal situation.
Stay tuned for my next post
This is part 1 of a 2-part series. Stay tuned for Part 2: My 5 Solid FI Kung Fu Moves You Can Do to Kill Lifestyle Inflation.
Mr. Prairie FIRE
P.S. I apologize if my post sounds more like a rant than actual advice or insight. I just really really really hate lifestyle inflation.