Do you find yourself spending every penny you earn, no matter how much you make?
Lifestyle inflation (a.k.a lifestyle creep) was our biggest financial mistake. Sure, education isn’t a path to extreme wealth, but you can earn a decent living. Even as two brand new teachers, we earned above the median household income. Over time, with use of the education career ladder and teacher side hustles, we tripled that initial income.
Then we spent every cent.
The result? After 15 years, we had a barely positive net worth. We’d gone from spending just over $3k a month to spending 3x that. A mountain of debt balanced out our assets – two car loans, a house that was too big, and a vacation home.
We’d lost to lifestyle inflation. Badly. Here’s how we woke up and fought back. You can too.
What Is Lifestyle Inflation?
Lifestyle inflation means your living expenses grow as fast, or faster, than your income.
If you’ve experienced this, you may feel weak or dumb. We certainly did when we became aware.
The truth is – it’s a critical part of our society. The signals are embedded everywhere. You earn more so you can buy more. Career progress is rewarded with consumption. Bigger houses, luxury cars, more expensive vacations. It’s easy to fall for.
Our Lifestyle Inflation Milestones
The biggest moments of lifestyle inflation happen with jumps in income. It’s good practice to take at least half of any raise and save or invest it. Instead, most of us just buy more – a bigger car, nicer house, or luxury vacation. We did ‘em all.
Right after you graduate college or start your first career is the best opportunity to build a strong financial foundation. If you can fix your expenses at or near this level, and start slowly investing you’ll be in great shape. If only we’d done that, we’d be financially independent – and then some.
Unfortunately, we’d both felt restricted by our childhoods. When we started making actual money, we immediately started spending. For a time we even spent more than we earned – on nights out and vacations.
At some point, my feelings of financial insecurity kicked in and we decided to eliminate our debt. For almost two years we actually controlled our expenses and put any extra money we earned on our debt. It was smart!
Then – once the debt was gone, we inflated our lifestyle all the way to our income. We never outspent our income again, but we never started saving. It was dumb!
Of course not – we bought a bigger house, new cars, and started going on more expensive trips.
I think of lifestyle creep as a subset of lifestyle inflation. Lifestyle inflation often comes in big jumps. The creep just grows over time – often without you even realizing it. After we failed to capitalize on our big jumps, we also just spent more every year. Things that were luxuries before became “necessities”.
For us, this was especially true with travel. We used to be satisfied with road trips or just being in a nice area. Now, we flew to tropical locations and stayed only in expensive rooms with incredible views.
How We Fought Back
Finally, thanks to a financial epiphany, we woke up. Looking around, we realized we’d be working forever to pay for our lifestyle. Especially since the creep was ongoing.
We decided we wanted a different life. Then, we took action.
Started Paying Attention
The biggest driver of our lifestyle inflation wasn’t actually a need to keep up with anyone else. We simply spent without thinking about it. It was a feature, not a bug.
The first thing we did was pay attention to what we were spending every month. We tracked expenses. Watched our cash flow. Actually calculated our net worth.
It’s hard to remain clueless when you’re looking at the actual information right in front of you. Simply paying attention is an underrated action step. As they say, you manage what you measure.
Created an Anti-Budget
Next, we created an anti-budget. We’d done actual budgeting before during our debt paydown phase. It didn’t work well for us – it was too restrictive and triggered some of our money mindset challenges.
Instead, we planned out in advance what our saving and investment goals were. We automated those, and then spent the rest.
Then Tightened It Up Every Year
In our first year of fighting back, we made big gains just by estimating what we could do. Those gains were motivating and we built a better understanding of our financial situation. We also started to see ways we could save even more.
So, each year we reviewed our anti-budget and set more aggressive financial goals. These motivated us to cut our spending even more.
Attacked Our Biggest Expenses
Yes, there was certainly fluff we could cut out of our budget. It’s hard not to have some when you spend mindlessly. Cutting that out gave us immediate progress and wiggle room.
We really started beating lifestyle inflation when we got intentional with our big expenses.
I’ve written extensively about our housing journey. It’s had the biggest impact. We’ve gone from spending more than $4000 a month on housing down to $500 – yes, we reduced our housing costs by more than 90%. We did it by first downsizing our home to cash out equity. Then, we decided to move back into our rental. We used the equity to gain mortgage freedom.
That savings alone cut our monthly spending by almost 40%. Big moves matter if you can make them.
We used to eat out several times a week. I’d buy lunch virtually every day at work. We’d also drink most weekend nights.
We realized it was mostly out of habit, not enjoyment. This was an area of real lifestyle creep – just unseen steadily growing expenses.
Now, I take my lunch most days. We are working on meal prepping and planning. We’ve reduced our alcohol consumption considerably – and feel healthier for it!
We still go out and don’t mind spending on a good meal – but it’s an intentional choice. We’ve reduced our overall expenses by almost 5% just by being a little more intentional with our food spending.
Just before we actually started paying attention to our spending, we purchased two new cars. With loans – low interest, but still loans. We paid those off early and now own two cars that will last us for years. Unlike before, we won’t replace them just because we want an updated model.
That crushed another 10% of our lifestyle inflation.
You can argue housing, food, and transportation are necessities. We were just spending a lot more than we should on them.
Travel is theoretically a luxury – but it’s really important to us. However, somewhere along the way we just started spending more on it, even though it didn’t increase our enjoyment.
We won’t give up travel, we have just (significantly) reduced our spending on it. Here’s how:
Started Road Tripping Again
Road trips used to be our biggest joy. Sometimes in our mid-30s, we stopped doing them. We’d fly to luxury resorts instead. We’ve added a road trip back into our vacation rotation and reclaimed everything we love about them.
Credit Card Rewards
We traveled for years without taking advantage of credit card rewards. Foolish! Now, we intentionally use credit card rewards to help offset the costs.
We still spend – but this step alone saves us several thousand per year.
Yes, in our lifestyle inflation we bought a second home. While it was always part of our vacation plans it was expensive to carry and we used it less than we should have. We’ve corrected both of those.
The home is our primary vacation destination. We use it as an escape and have reduced our other trips significantly because of it.
Even more importantly, we’ve figured out how to own the vacation home for almost nothing. We operate it as a vacation rental. This generates almost enough to pay the full cost of owning the home every year – meaning every vacation we take there is almost free!
The shifts we made in vacation spending have reduced our lifestyle costs by almost 15%. Yes – it was that big a leak for us.
Take Advantage of Tax Free Investing
One expense that we don’t always think of in lifestyle inflation is taxes. If you’re earning more – you’re almost certainly paying more in taxes. We’d tripled our income and done nothing to offset the related tax increase.
Yes, we’d even lifestyle inflated our taxes!
As educators, we have access to multiple tax advantaged accounts. We can both invest in 403b and 457b accounts. I can invest in an HSA. As a result, we’re able to invest more than $80,000 a year pre-tax! That’s an incredible tax savings of over $20,000 a year.
Our monthly expenses are now less than 40% of what they were just three years ago. We now spend the same monthly amount we did in the 3rd year of our career when we were earning much less. We’ve crushed 17 years of lifestyle inflation!
Our primary residence is mortgage free and we still do everything we enjoy. We are just more purposeful about it.
When we first learned about FI, our calculations put us 13 years away. By eliminating our housing debt, dramatically scaling back expenses, and automating our investments we accelerated our financial independence plan.
We expect to reach financial independence two years from now. That’s a full seven years sooner, without changing any of our conservative assumptions. The seven years gained is almost entirely the result of rolling back our lifestyle inflation – we can invest more and we need less.
We live in a modest, but comfortable, house that we own outright. We did not give up travel. We eat food we enjoy and lead rich and fulfilling lives. This isn’t about deprivation, but rather intentionality. It’s worth it.
We Beat Lifestyle Inflation – So Can You
There is nothing unique about our story. We were clueless, careless, and started late. The best thing you can do is avoid lifestyle inflation entirely. The second-best thing you can do is fight back once you’ve suffered it.
We eliminated almost two decades of lifestyle inflation. So can you:
- Track Your Income and Expenses
- Develop a budget (we prefer the anti-budget)
- Reduce Your Biggest Expenses
- Take Advantage of Tax Free Investing Options
- Spend Strategically on What You Value