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:
https://twitter.com/FreequentFlyr/status/876907518609551362
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.
Wow, no printer or mouse? I gotta give you props. Hell, I’ve enjoyed enough of your posts that I’ll cheerfully spring for a mouse. No joke.
Christian,
Thanks for the offer! Drop me an e-mail at Independentlyfinanced@gmail.com and we’ll work it out.
—Indy
I dont understand how college educated people in the USA can be considered “poor” or “working poor”. Sounds more like just lazy. First to bed, last to rise kind of people.
Yep, of those roughly 69,900,000 million college educated people in the USA, probably none of them are actually “poor” or “working poor”, either middle class or above or lazy sleepers.
Helmholtz,
Save your breath. It’s impossible to convince someone of a fact their self-esteem, self-interest, and political affiliation depends on them not believing.
—Indy
SumOfAll maybe you don’t understand how the student loan scam in the US works, but if you follow traditional advice to go to the best school you get into, you can quickly find yourself $100-300k in debt at an outrageous interest rate with mediocre job prospects. It’s easy to say people should be more aware, but when you’re an unsure kid <24 years of age and EVERYTHING on TV and everyone around you telling you this is a good decision, it's hard to go against the grain. For example, a law school graduate from a top 25 school may graduate with $175k in just law school debt (thinking they will get a nice job to pay that off). But the truth is, they're more likely to end up with a ~$75-80k job (and even that requires luck and hard work). Meanwhile, if the loans are federal loans they will have a 6.8% interest rate that will have caused their loans to balloon (by the time they pass the bar) to $200k. You'll be paying almost $14k per year in interest alone, with nothing going towards paying down the mountain of debt. So, you can be college educated, do everything "right" and be relegated to modern day sanctioned indentured servitude.
People mess up and bite off more than they can chew. I get it. No one is forcing them to take out 300k in loans. If you cant figure out if its a good or bad idea for yourself, Im not sure life is gonna be so good for you. Some people are just speed bumps meant to be run over by others. Sucks, but its life
Not sure what the definition of need is, here. I’d tie it to capital – if in having the thing you ‘need’ nets you more capital in a predictable amount of time, then you did need it. Otherwise, I think you just want it.
In your case, another room for an office probably is not warranted. I.e., you just want it.
Or maybe your cheap digs aren’t cheap enough. I can get you two rooms for $375 each in a townhouse in NoVA if you want to move out of scocialist Maryland. Or one bigger room for the two of you for $500, and an office for $375. Of course, you’d have to share a house with a fierce libertarian.
I agree that Need is either poorly defined or misrepresented. If all you need for an office is a laptop then you don’t even need a desk, just set it on the dining table or your lap. So the reverse means a bigger desk or separate room must be a Want.
Ed and Ewejay,
Thank you guys for illustrating my point in a helpful way.
Let me reframe it again slightly: frugalist/minimalist/FIRE bloggers are obsessed with cutting expenses, and have so many unnecessary expenses that they can cut down the pain point: smaller and smaller houses until the house gets too small, driving older and older cars until they burst into flames on the side of the road, whatever.
But that aggressive cutting regime doesn’t work if what you can afford is already inadequate, i.e., if you’re poor. If you depend on your car to get to work, the fact that your car is “still running” isn’t an excuse not to replace it: a car that breaks down “just” once a month will cost you your job in pretty short order. That’s an example of a person who needs a newer/better car but still can’t afford it. The fact that a newer car isn’t necessary for the maintenance of human life is utterly irrelevant.
Once you realize this, you can see there are all kinds of needs that a person can have which aren’t the bare minimum necessary to sustain life. Ed wants us to move to Northern Virginia and lengthen my partner’s commute from 20 minutes on foot to an hour by Metro. The fact that the rent would go down slightly plays almost no role in the decision to decline his generous offer: we can afford our current place, although we need a little more space. If we had more money, we’d move to a slightly larger apartment as convenient or more convenient than our current place. However, our current place is the most suitable place we can afford, so we’ll keep it. The idea of moving to a smaller, less suitable place than we can afford makes no sense in this context.
This is precisely my defense of lifestyle inflation. When you are living within your means but below your needs, the natural thing to do when you earn more money is to spend more money such that your needs are closer to being satisfied.
—Indy
If you were to accept my definition of “need” (that which yields a ROI), then your example with the car would implicitly define poverty as a state where access to capital (in the form of debt) is not viable. I agree that this can exist.
Since predicting a ROI can be opaque (and less risky than creditors would price it), there may be many situations in which a person may “win” as they pull themselves out of poverty (i.e., they see a larger ROI than the risk assumed by creditors). To this extent, I can identify with your sentiment (though I find it a misappropriation of the word need).
I prefer to think of these scenarios in an optimistic way. They are part of the journey, which is virtuous cycle that anyone will experience as they organize, and seek self improvment, and find success in their work. Moreover, the FIRE types may overcompensate but find restricting consumption a powerful means of accumulating capital to wisely deploy it in exactly such scenarios. They’d also never encourage hour long commutes unless it was a conscious, short-term strategy. Lastly, my rooms may be bigger than you think, but I do have a well-maintained old car (and a second one to reduce my risk, were the first to explode into flames).