How Lifestyle Inflation is Keeping You From Getting Rich
It costs even more than you earn
Lifestyle Inflation is a simple concept. It refers to an increase in a person’s spending when their income goes up.
How exactly does this Phenomenon keep you from getting rich?
Let’s paint a picture here.
You are an individual who is working for a multinational company that specializes in technology and consultancy. This was your dream job and you are finally able to work for the company that you love and the salary is really good, so much so that you already have an investment account and are responsibly investing your hard-earned money so that when you retire you have a lot of money saved up. You have a promotion coming up in the next month and you are working very hard to truly earn that promotion.
The next month goes by and you have earned the promotion that you truly did deserve. That promotion also came with a pay raise, not a very huge one but enough to equate to an extra $500 spending money. Now, you have a choice either to spend your “extra” money or just to invest it.
Now let’s have look at this decision and see how we fair. If you spend that $500 on stuff like clothes and shoes, you will get an instant boost in morale and want to work harder towards getting what your company wants.
But if you choose to Invest that in something like the Standard and Poor’s 500. Since the S&P 500 has historically provided a return of 7% annually that means that your $9,000 a year contribution will turn into an astonishing $1.2 million in 40 years.
In contrast, let’s say after 5 years you realize that you should start investing. Now, it’s all the same but at a different time. Since you have less time in the market your money doesn’t have that much time to grow but it still grows up to a respectable $860,000.
There is also an alternative method of investing the money but that much more active as well as costs significantly less, provides a really good return on the money. I am obviously talking about investing in yourself.
Let’s just say that you buy a few books, and courses and invest the rest of the leftover money. Since you might buy 2 books in one month and 3 in another and the same with courses, it is hard to estimate how much you save so let’s just take an average of $200 a month invested in yourself and the rest in the S&P 500.
After 40 years, That invested money turns into an astonishing $745,000 but that is just the cherry on top. Let me explain, the money that you invested in yourself has now provided you a return in some form. Be it in the form of a side hustle or help you earn more at your current job. This Side Hustle would provide you with even more money to invest or spend on yourself and it will also provide you a separate source of income so in case your job doesn’t work out, you aren’t left out on the street.
Buying Designer Clothes and shoes worth thousands of dollars sounds like a good idea until you think about the impact it makes on net worth. While it might not be a good idea to buy these clothes and shoes worth such absurd amounts of money sometimes they might be worth the investment just to keep you going or as a treat to yourself.
