Lifestyle deflation is what happens when you are overly frugal. Frugality is often praised as a key element to achieving financial independence. However, it’s easy to take frugality too far.
I’m frugal to a fault. For 13 years after college, I saved 50% – 70% of my income partially due to humble living conditions.
From ages 28-37 I drove a $8,000 car that depreciated to $3,000 even after my income grew by 3X. And even after I had finally escaped the corporate world in 2012, I still couldn’t stop saving at least 50% of my income. This was despite my income taking a big hit!
By the third year of early retirement, however, I started seriously questioning the point of working and saving so much if the money was never going to be spent. Saving for retirement in retirement is illogical.
I started getting angry at being unable to kick my frugality addiction to the curb. People with much less were spending so much more and having a great time doing so. Why couldn’t I be more carefree?
How Frugality Leads To Lifestyle Deflation
Despite my best efforts to spend more like everyone who posts about their fabulous lives on Facebook, touching retirement principal still felt like a crime.
Instead of relaxing as a good retiree should do, here’s what I did instead to maintain a 50%+ savings ratio. This aggressive savings ratio post retirement has lead to lifestyle deflation.
- Worked on ways to generate $200,000 a year in passive income
- Took on part-time consulting gigs with three fintech companies over three years
- Continued publishing 3X a week on Financial Samurai
- Developed new online business partnerships
- Downsized to a smaller house to free up cash flow
- Bought a Honda Fit instead of a Jeep Grand Cherokee Limited
- Invested 90% of every dollar saved instead of spending it
Then one day, I burned out. I dropped all my consulting gigs. I wrote the biggest e-mail autoresponder known to man saying I was too busy. And I finally found some breathing room to spend a little more than normal.
Finally Started Spending More Money
Instead of limiting myself to $100 shoes, I ventured out and bought a $240 pair of shoes (on sale for 50% off of course). The guilty feeling only lasted for an hour while the pair of Tod’s loafers is still my favorite shoe three years later.
Instead of taking an Uber Pool to save $6 to go downtown, I began ordering my own Uber. I still feel guilty for some reason, but the feeling has lessened because I remind myself that time is way more valuable than money.
Instead of staying at a 3-star hotel in Angkor Wat, Cambodia, we decided to stay at a 5-star hotel for $100 more a night. We knew we were never coming back, so we also hired a private van with much needed AC to be our driver for $50 a day. It was so worth it.
Then I realized something. Keeping spending constant after a certain age eventually leads to lifestyle deflation because everything is relative.
If everybody still watched cathode ray tube TVs, you’d be happy with your tube TV. But you’re no longer as happy when everybody else is watching a paper thin 4K TV. If you don’t at least increase your spending at the rate of inflation, your quality of life will begin to deteriorate because you can’t help but notice progress all around.
For those of you who can’t seem to lift your spending despite an increase in your income and net worth, let me share with you five ways for overcoming frugality to avoid lifestyle deflation. Dying with way too much is poor consumption planning.
Halting Lifestyle Deflation In Five Steps
1) Find your marginal spending ratio.
Being overly frugal means you either don’t make enough money, fear your income won’t last, or are stuck mentally in a time when you didn’t make much money. There is no denying that having less money means you are forced to spend less.
If you suddenly started making an extra $10 million a year, you bet your bottom dollar that you’d be able to spend more freely. Therefore, the easiest way to crush frugality is to make exponentially more money. By doing so, you can’t help but spend more.
The key to unlocking additional spending is determining how much extra money you need to make in order to spend an extra $1.
Some consumers will spend an extra $1 when they only make 50 cents more. Others might require earning $10 to spend an extra $1. Earn enough to find your ratio for various things.
For example, I need to earn at least $500,000 more a year to feel comfortable spending $8,000 more on a first class ticket to Europe or Asia. Until then, I’ll sit in the middle seat near the toilet for 12 hours because $8,000 / 12 = $667/hour!
Related: When Do You Finally Feel Rich
2) Make your income more defensible.
Lifestyle deflation is avoidable with strong income streams. If your income and wealth are tied to the survival of a startup that has only 12 months left until it runs out of cash, there’s no way you’ll ever break free from frugality. Conversely, if you work in a massive corporation that never fires anybody, you should be able to open up the wallet a little wider.
Nowadays, the best way to create a more defensible income is to build multiple income streams. This includes both passive and active incomes. Get to a passive income level that covers all your expenses. If you do, you will crush your frugal habits.
Achieving $200,000 passive income figure was a relief after 16 years of trying. It is more than my wife and I spend each year. When we added on corporate consulting income on top of online income, we finally stopped checking the price of food before ordering at a restaurant.
We also didn’t care about the latest cost of an electronic gadget anymore because it was a business expense. We knew that worst case, even if our business went to hell, we’d have passive income made up of 10+ different sources that would carry us through on top of our principal.
3) Estimate your mortality.
Acknowledge your mortality and calculate how much you’ll have left at age 100. Just as most Americans don’t properly calculate their retirement target and plan for how to get there, many of us don’t calculate how much we’ll end up dying with if we don’t spend more.
We should be entering a decumulation of wealth phase between ages 40 – 60. This way, we don’t die with too much money. I’m personally starting to decumulate at age 45, which also happens to be the ideal retirement age. At age 45, you really start becoming aware of your mortality.
Right now you will be taxed at 40%+ on any wealth you leave behind after $12.06 million per person (as of 2022). Divide your current net worth by the difference between 100 and your age. If the number is greater than your average annual spending, you should be able to spend more freely.
At least every six months, I run my finances through Personal Capital’s Retirement Planner on my iPhone, and every time it says I’m in “Great Shape.” Love it! I imagine it’s kinda like being a beautiful person looking at him/herself in the mirror each morning. You know you’re beautiful and can’t get enough of yourself! Try Personal Capital’s Retirement Planner and other fantastic financial tools yourself to see how you’re doing. Simply sign up for a free account using the button below.
4) Find your forever home.
Once you’ve purchased a home you see yourself living in for 10+ years, you’ll feel a tremendous amount of relief. Saving up for a home is the largest financial undertaking for most people, especially those who live in major cities. Therefore, once you’ve conquered the tallest mountain, everything else will feel like an ant hill. Food and clothing are cheap in comparison.
Buying a primary residence is like paying yourself first. You’ll build equity through forced savings and hopefully principal appreciation over time. If you’re renting, you’ll always wonder when your rent will go up or when the landlord will want to kick you out for whatever reason.
As a result, you’ll have a tendency to hoard your money to pay for moving expenses, and potentially a more expense apartment since rents tend to always go up.
After finding and remodeling an affordable home in San Francisco with panoramic ocean views, I finally felt I could spend whatever excess cash flow I had on nicer things. Each stage of the remodeling process had me shelling out an extra $30,000 – $60,000 over a 3-6 month period. Once all the remodeling was done, it felt like I had an extra $10,000 a month to spend on whatever I wanted.
Related: Your Forever Home Is Really Not Forever
5) Set and achieve ambitious targets.
The reason why the 1/10th rule for car buying is so powerful is because it forces people to tether their wants to achievement. Many people get mad when they want to buy a $40,000 car, but realize their $80,000 income means they should only purchase a ~$8,000 car.
Flip the equation. Set a goal to earn $400,000 a year instead. It will motivate you to work towards your desires. With all the extra hustle, it will allow the buyer to think twice about spending so much on something s/he really doesn’t need. And if the $400,000 income is achieved, then there will be no guilt spending so little.
Just like how you’ll feel so much better eating a cheeseburger after you’ve trained six months for a marathon, you’ll feel so much better spending money after taking years saving up for a certain stretch goal. The guy who got up to eat a cheeseburger after watching four hours of football isn’t going to feel as good as the marathon runner who eats the same cheeseburger!
My Ambitious Goals
When I started suffering from tennis elbow at the age of 33, I made it a goal to go undefeated in one season at the 4.5 level. It was my way of giving the middle finger to pain. When I went 12-0 with various doubles partners in 2012, I felt an enormous amount of pride.
It was easy to replace my ratty tennis bag with holes with a snazzy looking one. Three years later when I got bumped up to 5.0 (top 1%), my tennis budget blew wide open because players aren’t supposed to improve after the age of 35.
In early 2015, I made an ambitious goal of growing organic traffic (not paid) to one million pageviews a month. After consistently hitting over 1 million organic pageviews a month for six months in 2017, I felt zero guilt paying $15,800 for a hot tub and $58,000 for a used Range Rover because it took me eight years of writing three posts a week. To understand how difficult that is, try writing one 1,500 word post a month. Now multiply that effort by 10.
If you really want to feel better spending money, try to stick to something difficult for at least 10 years. Since so few do, once you do, you will have no problem spending to combat lifestyle deflation.
Finally, I had an ambitious goal of writing a book during the pandemic. When Portfolio Penguin approached me in late 2019, I decided what the heck after lockdowns started on March 18, 2020. Buy This, Not That took two years to write and became an instant Wall Street Journal bestseller!
Avoid Lifestyle Deflation And Enjoy Your Money
Most of us are afraid of being judged by others for how we spend our money. But the reality is, everybody’s financial situation is different. Paying $10,000 for a first class ticket is ridiculous for someone making less than $100,000 a year. But if you’re worth $100 million, $10,000 is like a dollar bus fare for the rest of us.
You can overcome your frugality disease by starting small, and working your way up. The easiest way to reduce your frugal habits is by making more money and achieving certain stretch goals.
It’s when you buy things with money you don’t deserve (trust fund, inheritance, lottery, using a credit card, your spouse’s income, etc) that your conscience may start making you feel terrible about your spending.
You don’t get a gold star for being frugal. Being overly frugal simply means you haven’t earned or planned enough. This leads to lifestyle deflation. You only get a gold star if you’re able to maximize your lifestyle with the money you’ve earned. Don’t let frugality be a crutch or an excuse for not making more.
I regret not spending more in my 20s and 30s. In my 40s and beyond, I’m determined to let the lifestyle I enjoy keep up with inflation and then some. For those who have their finances together, I hope you do the same!
Related: It’s Revenge Spending Time!
Achieve Financial Freedom Through Real Estate
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. By the time I was 30, I had bought two properties in San Francisco and one property in Lake Tahoe. These properties now generate a significant amount of mostly passive income.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms.
Take a look at my two favorite real estate crowdfunding platforms that are free to sign up and explore:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
How To Combat Lifestyle Deflation
Lifestyle deflation happens when you don’t properly track your finances. Once you get a good understand of your finances, you can spend much more freely.
Stay on top of their finances by signing up with Personal Capital. It is the best free financial app on the web. Before Personal Capital, I had to log into eight different systems to track 35 different accounts to track my finances. Now I can just log into Personal Capital to see how my stock accounts are doing. I can easily check how my net worth is progressing too.
Personal Capital’s 401K Fee Analyzer tool is saving me over $1,700 a year in fees. I had no idea I was paying them for years! Another great feature is the Retirement Planning Calculator. It uses real data and Monte Carlo simulations to produce realistic retirement results.
Enjoy your wealth to the maximum! The pandemic has reminded all of us that tomorrow is not guaranteed.
For more Financial Samurai, you can join 55,000+ others and sign up for my free weekly newsletter here. I’ve been helping people achieve financial freedom since 2009.
Your advice about buying to build equity had me rolling on the floor in laughter,I rent in a Vancouver BC suburb,above ground suite for $500/mth which includes everything including the backyard.
My friends who own( to build equity),never have time to enjoy life as they work a full time job and a part time job to keep building their equity position.
By renting my space which I have never paid more than $750/ mth in my life has led me to accumulate financial assets which always return more than real estate.Speaking of which,every month this year my portfolio returned to me more than a years rent.
My friends spend double what I pay in rent just on maintaining their houses(taxes,maintenance,internet,hydro,gas,cable etc),then you add in the mortgage payment of $2500+, for thirty years,and last but not least the opportunity cost of $200,000 down payment at 6%.My friends cost to own is around $4700/ mth,which works out to $1,500,000 over thirty years,my renting at $750 costs me $270,000 over thirty years.
I know that they will have an asset to sell after thirty years that historically returns 1-2% but you would also have to take into account on my end of starting with a portfolio of $200,000 and adding $4200 a month for 30 years at 5% would give me a $4,352,000 portfolio.
Financial Samurai says
Glad I made you laugh! Always a good skill to have.
Oh man, if only I bought Vancouver real estate 5 or 10 years ago! That would be sweet. I settled with buying San Francisco real estate and finally sold a house I bought in 2005 for $1.52M for $2.74M in June 2017. It wasn’t a huge percentage gain, but I walked away with close to $1.8M after the house appreciated from ~$1.7M in 2012 to $2.74M in 2017. It was the easiest $1M I’ve ever made.
At the end of the day, if you’re happy still renting your same place 30 years from now, more power to you. You just have to look at what your lifestyle and net worth is today. If you’re happy, awesome! If you’re not, make a change. Why be poor if you can be rich and free right?
Related: The Average Net Worth For The Above Average Person
I love the example of how much you’ll be taxed on your wealth when you die. That’s definitely something to incentivize spending! I think the spending examples you pointed out related to living more comfortably in Cambodia were a great example! Since I’m far from retirement, I still try to be relatively frugal, but at the same time I want to live what I consider a comfortable and good life where I’m not just penny pinching the entire time even before retirement!