I had an interesting conversation the other day with a former work colleague about lifestyle inflation.
Since most people increase their expenses when they get a promotion or raise, one of the strategies to get to FI faster is to stop puffing your lifestyle, even if your salary goes up. In this way, you can passively save money on early retirement.
But what if you beautiful retired? What if you have enough for the rest of your life? When your earnings / dividends / capital gains are increasing but you never need to save another penny again?
Should You Inflate Your Lifestyle?
Would you be stupid not to do it?
I had the same conversation with Pete (aka “Mr. Money Mustache”) a few years ago at a Chautauqua and they came to very different conclusions.
From my ex-colleague’s point of view, expenses are relative. $ 100,000 a year might sound excessive if your portfolio is $ 1 million, but what if your portfolio grows to $ 2.5 million? Then with a safe payout rate of 4%, it’s perfectly fine. And what if your portfolio grows to $ 10 million later? Even spending as much as $ 400,000 a year would be reasonable.
Pete, on the other hand, thought the expenses were absolute. Despite the incredible success of his blog and his ability to make $ 400,000 a year, Pete told me that his family was still living on just $ 25,000 a year. In his view, expenses are not relative. It’s fixed. If that’s the amount he needs to be happy, why spend more? In fact, he even ran an experiment where he wasted $ 1,000 in a week just for fun and tracked his happiness level. The result? The extra expenses didn’t increase his luck at all. $ 25,000 was his highest spending on happiness.
This made me think about our current spending situation. Now that our net worth has grown to $ 1.8 million, using the 4% rule, we could withdraw $ 72,000 a year and still have a 95% success rate. To have a 100% success rate we could withdraw USD 63,000 / year (3.5% / year) and the money will never run out.
And yet our annual budget was still only $ 34,000 / year last year. This year, despite locks in the rearview mirror, we’ll still be spending less than $ 40,000 on the two of us.
We’re at least $ 23,000 / year or $ 1917 / month under Budget. Why? Is that some kind of madness? Any illness?
Some people like to call it deprivation. Others, madness.
I call it “win”
Here are the reasons why I haven’t increased our spending and don’t see the need for it:
I enjoy optimizing
I know some people think optimizing their expenses is a chore, but to me optimizing is like a game of chess that I never lose. It lets me be creative, challenges my brain, and feels like I’m winning every time. In fact, I find it deeply satisfying to look at my spreadsheets and marvel at the optimized purchases. I’ve never had this feeling of pointless spending (* cough, trainer coughs *). I enjoy optimizing. Mindless consumption is boring.
I hate cleaning and maintaining things with the power of a thousand waterfalls. As a minimalist, I value experiences and relationships about things. Especially since these things inevitably end up in a landfill and destroy the environment. I prefer the European way of life: living in a small space, spending time in cafés, exploring nature and using public transport. This reduces the stress of owning and maintaining expensive things, and gives me time for things I value like experiences, friends, family, and passion projects.
To prove that you can happily live on $ 40,000 when you travel the world or live in an expensive city
When our story first came out on CBC, people said that two people couldn’t possibly be happy living on $ 40,000 a year. Especially in an expensive city. But not only were we happy to live in Toronto for $ 40,000 last year, we were able to travel the world for 5 years with that amount.
Since I grew up in China, where my whole family survived on 44 cents a day, I have the following perspective: Wealth is relative. Someone in a neighborhood where the median salary is $ 200,000 will be unhappy to make $ 100,000, but someone in a neighborhood of $ 30,000 will be perfectly happy to make $ 60,000. Much expense arises from trying to impress others. Renting an apartment, cooking, occasional dining, walking, swimming, and using public transport are inexpensive.
For this reason we keep our original portfolio (A) separate from our post-FI income (portfolio B) to show you that we are still living on 4% of the original portfolio. In fact, since the 4% rule takes inflation into account, we should increase that amount to $ 45,000 a year, but I just don’t feel like it is necessary. I am perfectly happy to be living on $ 40,000 a year. And even the occasional luxury doesn’t break this budget.
Since I retired, I’ve stopped cutting coupons and worrying about saving $ 2 on shampoo. In fact, we recently went to our favorite French restaurant to celebrate our 10th wedding anniversary.
The bill was nearly $ 500 after tax and tip, thanks to an oh-so-fancy meal of black sturgeon caviar. You read that right people. Me and caviar, finally together.
Given that we have $ 1900 under budget every month, we could eat that fancy pants meal once a week every week for the rest of our lives and still barely touch our portfolio.
Will i do this anyway? Nope. I lie on a plastic stool in Chiang Mai just as happily devouring a hot bowl of Khao Soi as I spoon black caviar onto finely chopped whole-grain blinis in an upscale French restaurant.
Does this make me weird? Probably. That’s just me and I don’t give a shit what anyone thinks.
And as it turns out, I’m not alone. In fact, I’ve spoken to several Chautauquan who think the same way. One of them is even a doctor! It is not surprising that an engineer likes to optimize, but a doctor?
This unicorn has a portfolio of $ 2.8 million but lives on $ 60,000 with his wife and three children and travels the United States and Mexico in an RV. He also described the feeling of optimization as “winning a game”. He wants his children to “enjoy life without comparing themselves to others and feeling like they need a lot of stuff to make them happy”. If we ever become parents, these are the kind of parents I want to be.
And it’s not just the ones in the FIRE room, Warren Buffet is like that too. The billionaire still lives in a house he bought for $ 285,000 and has a $ 3.89 McDonalds bacon, egg and cheese sandwich for breakfast. In fact, if the markets are bearish, he will downgrade to the $ 3.19 Sausage Egg Cheese Sandwich.
Buffet says that he values experiences and relationships simply over expensive things, because “you can’t buy health and you can’t buy love”.
Since I stopped working, I’ve been the healthiest in my life. I used to have to wear a wrist brace from the carpal tunnel at work and take anti-anxiety and antidepressants. Since I retired, I’ve been losing my wrist brace and stop taking pills. And because we’ve bought back our time, we can hike, swim, and eat healthy home-made organic foods every day. In fact, after Wanderer’s examination, his doctor diagnosed him as “hideously healthy”.
And since I had the time and space to work on my relationships, I was able to forgive my mother, spend time with my father, and make friends around the world (also known as my “Chautauquan family”). Buying back my time at FI so I can work on my health and relationships is the best money I have ever spent.
Instead of lifestyle inflation, which doesn’t bring me any additional happiness, I prefer to spend it on friends. This year I spent money from Portfolio B to invite friends to dinners, spas, escape rooms, and commission art from them. This is money well spent and I couldn’t be happier. After all, what good is money if you don’t spend it on friends?
What do you think? Should we increase our spending? If all of your basic expenses were covered, what would you be spending the extra money on?
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