An important conceit of a variety of forms of financial advice, including the financial independence space but also genuine financial planners, is the avoidance at all costs of “lifestyle inflation.” Lifestyle inflation, the theory goes, is the curse of spending additional money on living expenses just because your income increases, whether it’s due to raises, promotions, bonuses, or job changes.
My insight into this phenomenon may be unfamiliar to you, because unlike your favorite financial independence blogger or investment banker, I’m poor.
Living below, above, and within your means
You can imagine at any income level someone choosing to spend more than they earn, less than they earn, or as much as they earn. In this context it’s irrelevant whether the person is saving aggressively for retirement or not: they can save aggressively whether they are spending more or less than they earn each month. For example, like many people I both have student loans and make sure to max out my Roth IRA each year. Additional years of IRA contributions are worth more to me than accelerating the pace of my student loan repayments, so I privilege IRA contributions above student loan payments. Your calculus, naturally, may be different.
Living below, above, and within your needs
The important thing to me is not whether you are living within your means. The important thing to me is whether you’re living within your needs.
As a poor person, I know that your means and your needs have different values. I live within my means, but below my needs. For example, this is my office:
Cleanest my desk has been in 6 months 💪 pic.twitter.com/HjysJ5Vdqu
— Free-quent Flyer (@FreequentFlyr) June 19, 2017
To the right of my desk is a wall. To the left of my desk is a dining room table. If I made more money, the most natural thing in the world would be to rent an apartment with an additional bedroom so I could set up a proper office instead of working at a small desk tucked away in the corner. This is an illustration of what it means to live within one’s means but below one’s needs.
Why don’t financial independence types understand this?
It appears to me that the reason financial independence bloggers are so obsessed with cutting expenses out of their budgets is that, never having been poor, they leapfrogged the “living within your means” step all the way to “living above your needs.” While the ordinary working poor have never had to “decide” to cut “unnecessary” expenses of their budget, the suddenly wealthy — whether doctor, accountant, or real estate magnate — immediately start spending their entire disposable income, including on things they later discover are entirely unnecessary.
But to be clear, this stylized case is extremely unusual among the public at large, however common it is among financial independence bloggers; whether or not your expenses are within your means is an entirely different question from whether they’re within your needs.
In defense of lifestyle inflation
For an ordinary person, i.e. not a highly-paid software engineer or owner of a vast real estate empire, the essential principle of financial management is not to “cut out all unnecessary expenses.” The important thing is the addition of all those expenses that are needed, but only those expenses that are needed.
I need an additional room to work in, but I can’t afford it. If I could afford it, I would happily pay for it.
Sound budgeting, in other words, isn’t about cutting out the unnecessary, it’s about adding the necessary. It’s irrelevant to me whether your necessary expenses are Vegas conferences with colleagues, chophouse dinners with clients, or something as minor as a little extra room to work in.
This is something that only someone building a lifestyle from poverty can understand; if you went straight from college to leasing new German automobiles, you’re naturally bound to find unnecessary expenses in your budget. If you never make that mistake, you have the great advantage of being able to spend more on things that matter, rather than spend less on things that don’t.