Stop Frugality From Leading To Lifestyle Deflation

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How to prevent lifestyle deflationLike many of you, I’m frugal to a fault. For 13 years after college, I saved 50% – 70% of my income partially due to humble living conditions. From 28-37 I drove a $8,000 car that depreciated to $3,000 even after my income grew by 3X. And even after I had finally escaped the corporate world in 2012, I still couldn’t stop saving at least 50% of my income.

By the third year of early retirement, however, I started seriously questioning the point of working and saving so much if the money was never going to be spent. Saving for retirement in retirement is illogical. I started getting angry at being unable to kick my frugality addiction to the curb. People with much less were spending so much more and having a great time doing so. Why couldn’t I be more carefree?

Despite my best efforts to spend more like everyone who posts about their fabulous lives on Facebook, touching principal still felt like a crime. Instead of relaxing as a good retiree should do, here’s what I did instead to maintain a 50%+ savings ratio:

* Worked on ways to generate $200,000 a year in passive income

* Took on part-time consulting gigs with three fintech companies over three years

* Continued publishing  3X a week on Financial Samurai

* Developed new online business partnerships

* Downsized to a smaller house to free up cash flow

* Bought a Honda Fit instead of a Jeep Grand Cherokee Limited

* Invested 90% of every dollar saved

Then one day, I burned out. I dropped all my consulting gigs, wrote the biggest e-mail autoresponder known to man saying I was too busy, and finally found some breathing room to spend a little more than normal.

Instead of limiting myself to $100 shoes, I ventured out and bought a $240 pair of shoes (on sale for 50% off of course). The guilty feeling only lasted for an hour while the pair of Tod’s loafers is still my favorite shoe three years later.

Instead of taking an Uber Pool to save $6 to go downtown, I began ordering my own Uber. I still feel guilty for some reason, but the feeling has lessened because I remind myself that time is way more valuable than money.

Instead of staying at a 3-star hotel in Angkor Wat, Cambodia, we decided to stay at a 5-star hotel for $100 more a night. We knew we were never coming back, so we also hired a private van with much needed AC to be our driver for $50 a day. It was so worth it.

Then I had an epiphany. Keeping spending constant after a certain age eventually leads to lifestyle deflation because everything is relative. If everybody still watched cathode ray tube TVs, you’d be happy with your tube TV. But you’re no longer as happy when everybody else is watching a paper thin 4K TV. If you don’t at least increase your spending at the rate of inflation, your quality of life will begin to deteriorate because you can’t help but notice progress all around.

For those of you who can’t seem to lift your spending despite an increase in your income and net worth, let me share with you five ways for overcoming frugality so you can maximize your lifestyle. Dying with way too much is poor consumption planning. 

Halting Lifestyle Deflation In Five Steps

1) Find your marginal spending ratio. Being overly frugal means you either don’t make enough money, fear your income won’t last, or are stuck mentally in a time when you didn’t make much money. There is no denying that having less money means you are forced to spend less. If you suddenly started making an extra $10 million a year, you bet your bottom dollar that you’d be able to spend more freely. Therefore, the easiest way to crush frugality is to make exponentially more money. By doing so, you can’t help but spend more.

The key to unlocking additional spending is determining how much extra money you need to make in order to spend an extra $1. Some consumers will spend an extra $1 when they only make 50 cents more. Others might require earning $10 to spend an extra $1. Earn enough to find your ratio for various things.

For example, I need to earn at least $500,000 more a year to feel comfortable spending $8,000 more on a first class ticket to Europe or Asia. Until then, I´ll sit in the middle seat near the toilet for 12 hours because $8,000 / 12 = $667/hour!

Related: When Do You Finally Feel Rich

2) Make your income more defensible. If your income and wealth are tied to the survival of a startup that has only 12 months left until it runs out of cash, there’s no way you’ll ever break free from frugality. Conversely, if you work in a massive corporation that never fires anybody and provides everyone a nice pension after 20+ years of service, you should be able to open up the wallet a little wider.

Nowadays, the best way to create a more defensible income is to build multiple income streams – including both passive and active incomes. If you can get to a passive income level that covers all your expenses while also having a day job income, you should be able to crush your frugal habits.

Achieving $200,000 passive income figure was a relief after 16 years of trying. It is more than my wife and I spend each year. When we added on corporate consulting income on top of online income, we finally stopped checking the price of food before ordering at a restaurant. We also didn’t care about the latest cost of an electronic gadget anymore because it was a business expense. We knew that worst case, even if our business went to hell, we’d have passive income made up of 10+ different sources that would carry us through on top of our principal. 

3) Realize your mortality by calculating how much you’ll have left at age 100. Acknowledge your mortality and calculate how much you’ll have left at age 100. Just as most Americans don’t properly calculate their retirement target and plan for how to get there, many of us don’t calculate how much we’ll end up dying with if we don’t spend more. Right now you will be taxed at 40%+ on any wealth you leave behind after $5.49 million. Divide your current net worth by the difference between 100 and your age. If the number is greater than your average annual spending, you should be able to spend more freely.

At least every six months, I run my finances through Personal Capital’s Retirement Planner on my iPhone, and every time it says I’m in “Great Shape.” Love it! I imagine it’s kinda like being a beautiful person looking at him/herself in the mirror each morning. You know you’re beautiful and can’t get enough of yourself!

Personal Capital Retirement Planner

$1.2M turns into $20M+ in 50 years? Time to spend!

4) Find your forever home. Once you’ve purchased a home you see yourself living in for 10+ years, you’ll feel a tremendous amount of relief. Saving up for a home is the largest financial undertaking for most people, especially those who live in major cities. Therefore, once you’ve conquered the tallest mountain, everything else will feel like an ant hill. Food and clothing are cheap in comparison.

Buying a primary residence is like paying yourself first. You’ll build equity through forced savings and hopefully principal appreciation over time. If you’re renting, you’ll always wonder when your rent will go up or when the landlord will want to kick you out for whatever reason. As a result, you’ll have a tendency to hoard your money to pay for moving expenses, and potentially a more expense apartment since rents tend to always go up.

After finally finding and remodeling an affordable home in San Francisco with panoramic ocean views, I finally felt I could spend whatever excess cash flow I had on nicer things. Each stage of the remodeling process had me shelling out an extra $30,000 – $60,000 over a 3-6 month period. Once all the remodeling was done, it felt like I had an extra $10,000 a month to spend on whatever I wanted. 

5) Set and achieve ambitious targets. The reason why the 1/10th rule for car buying is so powerful is because it forces people to tether their wants to achievement. Many people get mad when they want to buy a $40,000 car, but realize their $80,000 income means they should only purchase a ~$8,000 car. By flipping the equation and setting a goal to earn $400,000 a year, it motivates the buyer to work towards their desires. With all the extra hustle, it will allow the buyer to think twice about spending so much on something s/he really doesn’t need. And if the $400,000 income is achieved, then there will be no guilt spending so little.

Just like how you’ll feel so much better eating a cheeseburger after you’ve trained six months for a marathon, you’ll feel so much better spending money after taking years saving up for a certain stretch goal. The guy who got up to eat a cheeseburger after watching four hours of football isn’t going to feel as good as the marathon runner!

When I started suffering from tennis elbow at the age of 33, I made it a goal to go undefeated in one season at the 4.5 level. It was my way of giving the middle finger to pain. When I went 12-0 with various doubles partners in 2012, I felt an enormous amount of pride. It was easy to replace my ratty tennis bag with holes with a snazzy looking one. Three years later when I got bumped up to 5.0 (top 1%), my tennis budget blew wide open because players aren’t supposed to improve after the age of 35. 

In early 2015, I made an ambitious goal of growing organic traffic (not paid) to one million pageviews a month. After consistently hitting over 1 million organic pageviews a month for six months in 2017, I felt zero guilt paying $15,800 for a hot tub and $58,000 for a Range Rover because it took me eight years of writing three posts a week. To understand how difficult that is, try writing one 1,500 word post a month. Now multiple that effort by 10. Staying consistent for this long is not easy.

Enjoy Your Money

Most of us are afraid of being judged by others for how we spend our money. But the reality is, everybody’s financial situation is different. Paying $10,000 for a first class ticket is ridiculous for someone making less than $100,000 a year. But if you’re worth $100 million, $10,000 is like a dollar bus fare for the rest of us.

You can overcome your frugality disease by starting small, and working your way up. The easiest way to reduce your frugal habits is by making more money and achieving certain stretch goals. It’s when you buy things with money you don’t deserve (trust fund, inheritance, lottery, using a credit card, your spouse’s income, etc) that your conscious may start making you feel terrible about your spending.

You don’t get a gold star for being frugal. Being overly frugal simply means you haven’t earned or planned enough. You only get a gold star if you’re able to maximize your lifestyle with the money you’ve earned and not die with too much. Don’t let frugality be a crutch or an excuse for not making more.

I regret not spending more in my 20s and 30s. In my 40s and beyond, I’m determined to let the lifestyle I enjoy keep up with inflation and then some. For those who have your finances together, I hope you do the same!

Related:

When Income Is More Important Than Net Worth

It’s Impossible To Stay Retired Once You Retire Early

Readers, anybody suffering from being overly frugal? What are some of the steps you are taking to be a better spender to optimize your lifestyle? Is being frugal a symptom of poverty?

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