January 21, 2021
Lifestyle inflation, the bane of many online financial voices, has earned a bad rap. We all have heard the standard advice, as your income increases you should avoid increasing your expenses, saving everything extra for some future so you can live like you do now just with less work. So much of standard advice condemns spending salary increases, bonuses, tax refunds, or any other extra money that rolls in.
I am very much a financially responsible person, but ask anyone that knows me and they will tell you that I love to spend money. I enjoy the finer things in life and want the freedom to do so. Much of my early years in my career centered around working insane hours to make sure I out-earned my spending. I worked hard so I could do whatever I wanted in my free time. My entire goal was to work hard on making money and even harder on developing skills that paid me more when I did work. In essence, I use lifestyle inflation to make more money.
Two years ago, my childhood friend invited me on his ‘last road trip’ before he became a father. We did it on the cheap to satisfy both our budgets, but I insisted on a very important upgrade. As children we spent hours playing basketball in his driveway, the game is important to our friendship. So on our road trip, we went to see the Toronto Raptors play a road game. It was an experience both of us will remember for a long time. Later that year, the Raptors made the NBA Finals for the first time ever. I decided to spend a small fortune on two tickets and brought him with me. It’s a cost he couldn’t reasonably have justified. For me, I’d put in the years of work and had enough luck to allow myself these luxuries and jumped at the opportunity to share the experience with him. I had that opportunity because of the lifestyle inflation I built into my finances. And, sitting near the court, I met fellow fans that would eventually become clients. In essence, the tickets paid for themselves.
None of that - the experiences, the time with my friend, nor the new clients - would have happened if I concerned myself with preventing lifestyle inflation. We have been conditioned to see luxury as wasteful, but I view it as a motivator. Not only do I want the luxury car, but I want the beach vacations. I want the absurdly large house. I want the boats and lakefront lifestyle. I don’t shy away from my wants. Instead, I view lifestyle inflation as my friend and tool to build my wealth.
Due to this outlook, I’ve adapted lifestyle inflation into my wealth building process. It helps me set goals, it motivates me during long days and it provides rewards for the work I do, especially when I can share it with family and friends. Instead of looking at lifestyle inflation like something that needs to be shunned, use it to motivate your own wealth goals.
Although we can all use a healthy dose of stoicism from time to time, we rarely jump out of bed, excited over a minimalist lifestyle. I’ve never met anyone that has a vision board of a small apartment with no view and a cost-conscious bicycle. We’re motivated by things that we desire, especially when they feel almost unattainable. This is why lifestyle inflation is such a difficult thing for people to prevent or even comprehend, since we want to afford what we now currently can’t.
Your goal should not be to avoid the urge to want, but instead let it propel you forward. After all, we all want. You can’t avoid that. Sure, it may be good to focus on a few things you want more than other things. Still you seek to achieve what you currently don’t have. For those without a home, they want a home. For those with a home, but without a car, they want a car. For those with the home and car, they may want a dream vacation. All of these motivations are valid. Use those motivators to drive your efforts.
To achieve what we want, we need to increase our means. If you lean into some lifestyle inflation, you can access things you could not prior and use that to push you to obtain more. For something like your housing, you may desire to own a house. Then when you own a house, you may desire a bigger one. Then when you own a bigger one, you may desire a better location that sits near a beach and provides you with serenity. That dream house will now allow you the peace of mind to focus on your work and do more. There’s nothing wrong with wanting to afford such luxury, especially if it helps you do more.
Use that want to your advantage.
Many struggle with this concept because they don’t look broadly enough at what they own. If you buy things that you want then you have assets. Yes, most of them depreciate, but you still own them. This gives you flexibility should you need it. While if you truly want something, you should go for it no matter the type of asset, also think about your assets that fit within these three buckets: appreciating, asymmetric information assets, and collectors items. With these purchases, your lifestyle inflation will make you wealthier.
Appreciating assets probably make the most sense to everyone, on first read. If you buy an asset that’s expected to appreciate over time, then you’re going to benefit in the future by buying it today. People will warn you, for example, that buying a house can lose money in certain markets and, yes, that’s technically correct, but losing money on most real estate is not the expected outcome. Instead, over time you know that real estate typically increases. So if you spend more on an appreciating asset as part of lifestyle inflation, then you can become wealthier while living larger. Of course it may not maximize your money compared to other options, but it feeds your motivation and gives you an increasing asset.
The second, asymmetric information assets, are often much easier to get on board with because the payout happens faster. If you can buy an asset you want for under market value, enjoy it and sell it for a profit, then buy it. It sounds simple, but so few people do it because they are worried about losing their investment. That’s where increasing your information asymmetry comes in. If you know more than the seller, or can repurpose the asset to make it more valuable, then you can live better and profit. Think about buying a car you really want for less than market price, driving it for six months or a year and then selling for the same price or more. These opportunities exist everywhere in luxury markets. When you learn to use them effectively, then lifestyle inflation becomes a wealth building exercise.
The third, and most difficult, is buying collectible assets. If you buy the right rare and limited items then you can make money by owning things you want. Owning your favourite athlete’s signed card is an example of this, if it consistently increases in value. Or a favourite artist’s work that just moves you can slowly make you wealthy while you hang it in your living room. These are the hardest assets to select for their appreciable value because collectible markets are notoriously fickle. Knowing what will increase isn’t always a guarantee. Many people buy things they want as part of lifestyle inflation and the collectible nature of the market emerges or blossoms after the fact. You may not always even know your purchase will increase in value, but if it does your net worth grows. People that avoid lifestyle inflation will never get the luck of buying that artists’ work that rises multiples in a couple years or the Birkin bag that doubled in price while you enjoyed it. Someone that avoids lifestyle inflation would argue that they also wouldn’t buy anything that ends up becoming worthless. But the value is what you place on it. The appreciation upon selling is the only part you don’t necessarily control.
Remember, the purchase of these assets can make you wealthy even when you don’t have that intention when buying. Use lifestyle inflation to purchase such assets.
Much of the luxury experience involves charitable giving. Luxury dinners masquerading as charitable events, supercar rallies that require donations to a chosen charity as an entrance fee or an exhibition tied to improving access to the arts are just some of the examples of such events where you gain an experience and do some good in the process. That doesn’t even include the fact that when you make more, you can give more to charity directly. It’s much easier to donate to charity when your income increases, but when you’re so worried about lifestyle inflation and protecting your assets you miss out on this.
One of the more confusing parts of inflating your income and lifestyle is an expectation that you’re to give more of your wealth away. Some of the same people that would attack you for spending frivolously instead of saving will also attack you for saving over donating. Lifestyle inflation is extremely nuanced between spending, saving and giving and the balance will differ depending on the individual person. But you need to increase your income and personal comfort to then feel comfortable giving more. There are certainly many ways to maximize your giving methods, but they are still a by-product of lifestyle inflation and increasing your giving capacity.
Lifestyle inflation has become the proverbial boogie monster of the financial world, but you should reframe it as an effective tool in the process of building wealth. I don’t believe you should spend dollar for dollar your increases in income, but to spend zero is nonsensical and unrealistic.
Instead, find a method and spending rate that works for you as your income increases. Then embrace your increasing comforts and experiences as a method of motivation. We don’t all need to be monks swearing off the creature comforts we desire. Instead, use your increased income to buy assets that you enjoy. Maybe they grow, maybe they don’t. Occasionally, one will hit. It’s not a great plan to count on these in your planning, but a bonus here or there can make up for a little spending if you get lucky or have a strong grasp of a market.
My goal is not to tell you to be financially irresponsible, but to teach you that there’s plenty of middle ground between avoiding lifestyle inflation and acting irresponsible. In that middle ground, I’ve experienced a lifetime of memories with family and friends, funded by my increases in wealth. Lifestyle inflation has been a key to these experiences and I wouldn’t trade them for the world or a higher savings rate.
By Timm McLean, MBA |
CEO at WLTH