Spending Prison

Spending can be like a prison.

It’s counterintuitive. People are usually excited to earn more money because it means they are able to spend more. You can acquire more material possessions, eat (allegedly) better food, and so on. Don’t get me wrong, this is true to an extent. Increasing your earning/spending power enough to move up from poverty to something that resembles middle class or upper middle class can significantly increase your quality of life.

Here’s the other side that people overlook. As you increase your spending when your earnings increase, commonly referred to as lifestyle inflation, you are also increasing the spending level you are accustomed to. This, in turn, increases the amount you would need to save before you can quit the rat race. Remember the safe 4% withdrawal rate concept or rule of 25: take the annual income you want in retirement and divide by 4% or multiply by 25 and that’s how much you need saved and invested to afford to retire.

If you get a $10,000 raise but increase your spending by $10,000 as a result, you now need to save another $250,000 to retire (10,000 x 25) if you want to maintain your new spending level in retirement.

On the other hand, if you save and invest the $10,000 raise without increasing your spending level, you will accelerate your financial independence.

Which is more exciting? Buying a new car and eating out more or not needing to work sooner? Certainly, if you are moving from $15,000 per year to $25,000 per year, that extra $10,000 of spending is life changing. Pay increases up to the $40-50k range will tangibly improve your quality of life. But there really does come a point when pay increases feel more like a (very welcome) token of appreciation and no longer directly improve your standard of living. After all, pay is ultimately how your employer expresses how much they value your work. Talk is cheap, so they say.

It is cliche and typically said by those who earn a lot or are already rich, but it’s true. Money can’t make you happy. Not having money can certainly make you miserable – not being able to provide for your needs or the needs of those who rely on you. But after your needs are met and you have some modest comfort, each additional dollar spent buys you incrementally less happiness.

Once you find the level of income you need to be content, resist the impulse to spend more than that just because you can. Sure, you can afford that $8 fast food or $15 lunch at the restaurant. But do you really want to go to work just so you can buy that? If you can afford the $1200 payment a lightly used Audi R8, that’s great. But do you want to delay financial independence and keep driving to work every day just to finance the R8? If you have to go to work to earn the money to own an R8, that’s what you’re working for. Do you own it or does it own you? Who is your real boss?

One Reply to “Spending Prison”

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: