Creepin'

Hello Aspiring Chillers,

Firstly, congratulations to everyone for your hard work this year! For those of you striving to improve your personal finances, I recognize and admire your dedication to achieving life's goals.

Today, let's delve into the concept of 'lifestyle creep.’ Lifestyle creep occurs when, as you ascend in your career and your income increases, your expenses rise proportionally. This topic is particularly relevant at this time of the year, with many receiving year-end bonuses or celebrating well-deserved promotions. I recall the exhilaration of my first promotion – it was a profound acknowledgment of my efforts.

However, it's crucial to manage the financial aspect of such advancements wisely. Reflecting on my journey, I recognize instances where my expenses subtly escalated, which, in hindsight, I wish I had monitored more closely. Let’s use a retirement scenario to illustrate why understanding this is essential.

** Assumptions: 1. Savings Rate = (Income - Expenses) / Income. 2. You live the same lifestyle after retiring as you do during so your expenses do not change. 3. We are using the 4% rule to determine dollars needed for retirement.

While both people seem to be on the same track saving $10,000 annually, there are subtle yet significant factors influencing their retirement timelines. Retirement planning hinges on two key metrics: total annual expenses and savings rate.

1. Annual Expenses: This is the key to knowing when you will be financially free. The assumption is that you will spend around the same amount after retiring as you do currently. Therefore we have to have enough money to cover that lifestyle. That is why Person B needs an extra $1.25M to retire comfortably. They spend an extra $50K per year!

2. Savings Rate: This one is subtler but it proves an important point. Savings rate matters more than total amount saved because savings rate considers total expenses. In the scenario that we have no income (retirement) we have to have enough money to pay all of our expenses. Based on professional research you can pull 4% of your investments out of the market to pay your expenses per year and never run out of money. So having lower expenses allows you to save less money total and be considered financially free vs someone in the same situation but with higher expenses.

To combat lifestyle creep, be vigilant in these key areas:

1. Taxes: Understand how progressive tax systems impact your net income at different earning levels. In the above example, Person A with $50K of income has a Federal Tax plus FICA of $8,066 but Person B owes $22,418 on their $100K in the US. Check out the Calculator.

2. Housing: Often the largest expense, housing costs can escalate rapidly. Consider strategies like house hacking, and weigh the benefits of renting versus owning in the current market.

3. Cars: Avoid the temptation to upgrade vehicles unnecessarily. Opt for used cars paid in cash, especially in times of high interest rates.

4. Dining and Entertainment: Small savings in daily expenditures can accumulate significantly over time.

5. Hobbies: Be cautious about overspending on hobbies. Upgrading equipment unnecessarily can lead to substantial costs. Remember to use the rules for buying we spoke about previously!

Reflecting on my own financial journey, I've noticed a decrease in my savings rate from 50% in 2019 to just over 36% post-2020, despite an increase in income. This exemplifies the subtle yet impactful nature of lifestyle creep.

I encourage you to save diligently as your income grows. Should you wish to discuss strategies to enhance your savings rate, please reply to this email. I would love to chat with you about the complexities of financial life.