Financial Independence enemy: Lifestyle Inflation

What is ‘Lifestyle Inflation’

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.

BREAKING DOWN ‘Lifestyle Inflation’

Lifestyle inflation typically occurs when one goes from being a student to a full-time employee. Despite getting by on very little money as a student and skimping on everything from rent to groceries to nights on the town, once that first big paycheck arrives, things that were once luxuries become “necessities”, and spending increases significantly. Sharing a two-bedroom apartment with three other roommates to keep housing and utility expenses down suddenly seems unacceptable, and you go out and lease a one-bedroom apartment in which you will live alone. Riding a bicycle is no longer seen as a fast and convenient alternative to walking or taking the bus; instead, you need a $20,000 car. Lifestyle inflation causes us to live paycheck to paycheck, make the minimum payments on our credit cards, and not have any cash to fall back on when an unforeseen setback like a medical bill or job loss arises.
People can avoid lifestyle inflation by consciously establishing spending and saving amounts. An automated savings plan can be a good way to ensure that savings goals are met and spending is capped. Avoiding lifestyle inflation can mean achieving financial independence at a younger age, having the financial flexibility to choose a dream job over a higher-paying option, and retiring early.

A new bigger House

New House

I will change my house in September . We are buying a bigger and more beautiful house in a more prestigious neighborhood. It’s normal, we’ve become richer. This means more expenses and as a result drives away my dream of financial independence. This is a classic dilemma that those who want to face the path of financial independence must face. If the expenses increase, financial independence goes away. However, can we live a life with only financial independence as a goal? Financial independence is a tool to achieve a better quality of life. Surely in a bigger house in a more prestigious neighborhood the quality of life will improve even if the dream of financial indifference will have to wait a few more years.

My vision of Financial Independence

In my opinion there are many different visions of the concept of “financial independece”. You will find many blogs that talk about becoming millionaires in a few years others who will give you tips on how to save and live with little money. In my opinion both these visions are not correct.
Becoming millionaires in a few years is very unlikely, there are no magic recipes.
We live only once. the object of “financial independece” is to improve the quality of life. Today, compared to yesterday we have available new tools such as Peer to peer lending and crypto currencies that can help us integrate with classical instruments (bonds and shares). In the next posts I will tell you my experience

Financial Independence Calculator v2.0

In a previous post  I provide you a sheet. You could calculate how many months until you will achieve financial independence. I modified the previous sheet adding the effect of inflation and the increase in salary. If today I have expenses of 2000 euros it is unrealistic to think that in 10 years these will remain constant. I also expected that salary could increase in future years. I tried to calculate how easy it is to achieve financial independence. I imagined a rate of return on our securities portfolio of 7% inflation 2% and a wage that keeps pace with inflation. This shows that, although an ambitious goal may be, it is not an unreachable goal

you can find the new financial here 

Enjoy!

Financial independence: thinking to quit the rat race

Financial independence mean that you have a passive income (from a porfolio of stocks, bonds or other resources) and you can live without working, or if you prefer you can exit the “rat race”. What does it mean? According to Cambridge dictionarya way of life in modern society, in which people compete with each other for powerand money” This doesn’t mean you have to stop working at all. Probably you like your work in some ways but you don’t like your boss or some way or working or more simply you need more spare time to enjoy your life and do almost what you like. So financial independence doesn’t mean to watch tv all day long,  but get a new vison of work where you do the work you like simply because you like it. Enzo Biagi  one of the most important Italian  journalist  said “I would have been a free journalist too: thank goodness my publishers have never noticed it”. Yes if you are financial independet you can work for free.

Financial Independence Calculator

Financial Independence Calculator

In a previous post  I said that we have financial independence if passive income from our saving are greater than our expenses. To obtain this goal we save every month some money in some financial tools (stock, etf, bound, cryptocurrency…) with a yield. So suppose I have net salary from my job of $2500 and $2000 expenses every month, and I invest all my savings in financial instruments with 0.67% monthly return when will I be financial independent?  In this picture you maintain the money because the passive income are equal to expenses. Only inflation will affect your money. I’ll  be financial independent after 225 months

I provide a financial independence calculator you can freely use here 

Simply change  green cell with your data

Financial indipendence explained in 3 step

Financial independence is real simple to explain. If you have a job and you are a wise man problably you are in a situation like this

You have a job and income from it, you have expenses (bill, mortage ecc..) and if income > expenses you have saving. Simple

After that you can generate passive income from your saving (es if you buy stock they can generate dividends)  so the picture  can became like that

 

If your passive income = expenses you are financial indipendent so you can live

only from income from your saving without changing life style

 

If this is easy to understand the real question is “how can I achieve financial independence?” This is the main question but this trivial picture has more subtle question

About Financial Independence:

According to Wikipedia Financial independence means you have enough wealth to live on without working. Financially independent people have assets that generate income (cash flow) that is at least equal to their expenses. Income you earn without having to work a job is commonly referred to as “passive income”.  For example, if someone receives $5000 in dividends from stocks they own, but their expenses total $4000, they can live on their dividend income because it pays for all their expenses to live (with some left over).