The Math That Explains Why Lifestyle Inflation is a Wealth Killer
The Math That Explains Why Lifestyle Inflation is a Wealth Killer
Lifestyle Inflation Is A Wealth Killer By Zach January 24 2019 Four Pillar Freedom
Investopedia defines lifestyle inflation as:
Lifestyle inflation refers to increasing one’s spending when income goes up. Lifestyle inflation tends to continue each time someone gets a raise, making it perpetually difficult to get out of debt, save for retirement or meet other big-picture financial goals. Lifestyle inflation is what causes people to get stuck in the rat race of working just to pay the bills.
Two of the most common reasons for lifestyle inflation include:
The desire to impress peers and flaunt your success. After that big pay raise or promotion, it’s common to upgrade your house, car, wardrobe, dining habits, etc. to show your peers how well you’re doing in life.
The feeling of “I worked hard so I deserve this.” After all that time spent studying in the library or putting in extra hours at the office, it’s common to feel that you “deserve” to treat yourself with your increased income.
No matter what you believe is the true reason (or combination of reasons) for lifestyle inflation, one fact remains undeniable: lifestyle inflation is a wealth killer.
Here’s the math that explains why.
The Math That Explains Why Lifestyle Inflation is a Wealth Killer
Consider our friend Bob. In his first year out of college, Bob has a net worth of $0, a yearly income of $35,000, and yearly expenses of $30,000.
Let’s assume Bob is able to increase his income by 6% each year while only increasing his expenses by 2% each year.
Here is how Bob’s net worth will grow over the course of 20 years:
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