How to Avoid Lifestyle Creep

On this episode of The Long View, author, blogger, and “godfather of the FIRE movement” JL Collins discusses debt, financial freedom, and his new book: Pathfinders: Extraordinary Stories of People Like You on the Quest for Financial Independence.

Here are a few excerpts from Collins’ conversation with Morningstar’s Christine Benz and Jeff Ptak:

Is Financial Independence Attainable to People at Lower Income Levels?

Jeff Ptak: What do you think of the critique that financial independence movement is largely the province of well-educated people with high salaries? You encourage people to save half of their salaries, but that’s obviously easier to do if the income is say $100,000 and not $25,000. So, do you think financial independence is attainable to people at lower income levels?

JL Collins: Absolutely. And as I just said, if you read Pathfinders, you will read about people in those circumstances who have in fact done it. The other thing I’ll say is that I have met people who have extraordinarily high salaries, who are never going to achieve financial independence because they’ve constructed an extraordinarily high lifestyle. And I can remember back in the ‘90s, I was having lunch with a friend of mine who was in the financial business. And this guy, this was just before Christmas, he just gotten his annual bonus. It was $800,000, which was real money back in the ‘90s. And you know what he and I talked about at lunch? How he couldn’t make ends meet with a bonus of $800,000. Now that probably sounds absurd to most of the people listening. It sounded absurd to me. But when I sat back and listened to him talk about the houses, the cars, the private schools, the exotic travels, this lifestyle that he cobbled together.

Well, he was right—$800,000 plus his annual salary was not enough for that lifestyle. But the same token, I have an old high school buddy who has never made more than $40,000 a year, and he is financially independent. So, it’s important for people to recognize that financial independence isn’t a set number. It’s not you have to have this dollar amount. It’s a combination of two numbers: what your requirements are, which you have a lot of control over, and what your income and your total portfolio is. It’s that combination. And if you have that out of balance with too much spending, then it almost doesn’t matter how much you make. On the other hand, you can achieve financial independence with remarkably modest incomes.

The Problem With Lifestyle Creep

Christine Benz: I want to stick with this topic of what you call lifestyle creep in the book. And there’s a whole section about lifestyle creep, which obviously can be deadly to someone’s financial plan. Maybe expand on that. Talk about why that is so problematic, how many of us find ourselves on this treadmill where you’re constantly spending more, you’re earning more, spending more. What steps can people take to beat it back?

Collins: I think the reason that so many people are on that treadmill is we live in a culture that encourages that. We live in a very commercial culture, and this is not some great conspiracy, by the way, but there are lots of companies out there, including the companies that I recommend people invest in through their index fund, that are working hard to market their services and products. And that creates an aura of you need this, you need that, your life will be better with this, your life will be better with that, or your life won’t be any good without it, or you won’t find anybody to love if you don’t drive this certain car, whatever it is. So that is a huge drumbeat that encourages people to spend every dime that comes their way and, worse, to borrow money to spend more. So that’s something that I think most people are not aware of. It’s this undercurrent that is just kind of the way it is. It’s stunning to me that it’s accepted in the United States that it’s normal to carry debt. That’s like being covered with bloodsucking leeches from my point of view. I don’t think it’s normal at all, and you certainly can’t achieve financial independence if you’re carrying all this debt.

So I think that’s what lures people into lifestyle inflation. You come out of school, you start working, now you’re making some money, and there’s all these messages of what you can do with that money and all these messages that you deserve—you work hard, you deserve this, and you deserve that. So, it’s not surprising people get drawn into this. And you have to become aware of it, and you have to be willing to say, well, yeah, there are a lot of things I can do with my money, but one thing I can do with my money is I can buy my financial freedom. And of course, you buy your financial freedom by living on less than you earn and freeing up capital to invest. And for me, of all the things that I could spend my money on, spending it on my financial freedom was priority number one.

Saving, Spending, and Lifestyle Creep

Ptak: I wanted to ask another question about saving/spending lifestyle creep. I think you’ve told people that keeping tabs on the big three categories of spending—those being housing, transport, and food—is a good way to ensure that lifestyle creep doesn’t cause trouble for a financial plan. Do you think there are other off-the-beaten-path categories that can wreak havoc on a budget? I think that maybe one of the contributors in the book had mentioned kids sports as an example. Are there others that come to mind?

Collins: You named the big three and of course they are the big three for a reason. But sure, there are lots of things—travel can be one of them. Kids sports can be one of them. And, again, we live in a culture where the opportunities to spend money are almost without limit. So, it’s a matter of priorities. As I said earlier, I don’t think anybody can read Pathfinders and honestly say that they couldn’t do it. A lot of people are going to read Pathfinders and perhaps say, I don’t want to do it. And that’s legitimate. If there are other things in your life that are more important than your financial freedom—I personally have trouble understanding that—but nevertheless, that’s true for a lot of people. And if that’s the case and you make the decision that you would rather spend your money in different ways, well, it’s your money. It’s your life and you can do as you choose. The only thing that I hope with my book, The Simple Path to Wealth, and now Pathfinders, is at least people will be aware that there is another path other than the path of just spending everything. Whether they choose to walk down it or not is entirely up to them.