#13. Dad, what is lifestyle inflation?

Lifestyle inflation is when you keep increasing your lifestyle as your income grows. That is why so many wealthy people are in debt.

Beware of lifestyle inflation! Let me tell you a story of a wise man that spent his years working and crafting his trade. He used to say that work expands to fill the time allotted to it.  In other words, if you give an employee an hour to do a job they have always been able to do in fifteen minutes, they will take an hour to do it if you give them an hour to do it.

This beautifully illustrates the concept of lifestyle inflation.

In a nutshell, lifestyle inflation is increasing your standard of living based on a newfound increase in wealth that may or may not be permanent. In other words, even though your needs remain unchanged, you feel restless and have the urge to change and increase your lifestyle merely because you may have received a bonus or were given a salary increase.

Financially independent people plan for the future by maintaining a lifestyle that is in line with their income. The urge to announce to the world “you have arrived” is not part of their long-term financial goals. They understand the importance of maintaining a consistent and constant lifestyle if they can afford a temporary lavish lifestyle. They know that lifestyle inflation will take them further away from their financial independence. It can even lead to financial ruin.

Back to my story! I once knew an unassuming man who did maintenance work in our neighbourhood. He was a pleasant man who would often be out doing renovations and contract work. He drove an old minivan and was always very obliging with helping out people. One day over coffee, we chatted and I asked him about his life, his skills and his philosophy about money.

He explained that when he came to Canada as an immigrant, he worked for an employer who recognised his work ethic, honesty, and integrity. His employer gave him regular salary increases and bonuses. He said that he always had enough money for food, housing, and education for his children and never had the urge to spend the bonus money or increased salary. Instead, he saved it all.

He told me that his lifestyle and expenses did not increase as his salary increased. He lived comfortably on his original salary and he never allowed his additional money to dictate a new and lavish lifestyle. He saved all the extra money he had earned over the years and did not have the pressure to save for retirement. Instead, he accumulated wealth, planned to be financially independent and never allowed “lifestyle inflation” to dictate his spending and lifestyle.

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