Why lifestyle inflation prevents financial freedom

Realize why luxury has nothing to do with financial freedom, what lifestyle inflation means and what life motto you can really make it on.

An exciting question

In spring I was at a networking event for women and I had the pleasure of talking briefly with a female entrepreneur about financial freedom. She came up to me full of joy and said that she knew me and my blog, so she would like to ask me a question, "If you had to choose a new life motto right now, which of these two would it be?":

More financial freedom less luxury or less financial freedom more luxury?"

I hesitated for a moment and then answered: "I would prefer a mixture of more financial freedom and more luxury. Those who are financially free can afford more luxuries, that's a logical consequence for me.". "I'm afraid I can't do that" she said and said goodbye with a smile. "Think about it and get back to me as soon as you have decided on a motto".

Who is financially free does not allow himself luxury?

Great, I thought to myself, and went home to run those two sentences through my head again.

Does it make sense to you that someone who is financially free does not indulge in any luxury?? Not really or? We always think that those who have a lot of money can afford more and vice versa! Yes what now? I had a thousand thoughts in my head and finally decided to make some notes on both mottos:

Note 1: Motto "less financial freedom more luxury"

Granted I know many examples from my circle who live exactly by the motto "less financial freedom more luxury". They live off a paltry annual income, go out to eat at a restaurant every lunch break and drive swanky cars, which they can of course only afford by leasing them.

Admittedly, I also drove an expensive Audi S3 for years. That was my luxury. But as you can imagine, this car literally left a mark on my household budget.

Note 2: Motto "more financial freedom less luxury"

How do you think someone who lives according to the motto "more financial freedom less luxury" lives?? I imagine a woman with a bulging bank account, living in a 2 room apartment, owning no car and always bringing precooked food from home to work.

Honestly, who is going to believe that? What woman – also applies to the man! – would live like this if she could afford so much? You don't treat yourself to anything else in life, so why shouldn't the woman have a bigger apartment, drive an expensive car and enjoy her lunch at a restaurant?

What keeps ordinary earners from financial freedom:

And that's exactly how (formulated a bit more professionally, of course) I described my impressions to the entrepreneur in a short email and she promptly replied:

"The problem with most normal earners is that they want to become financially free at some point, but at the same time they are not willing to lower their current standard of living.

This quote from Alexander v. Humbold sums it up very well:

Wealth is when you buy things you don't need with money you don't have to impress people you don't like.

As you said Corinne, you could afford a much more expensive car today than before but you just don't do it. This is one of the best things to do if you want to become financially free."

The phenomenon of lifestyle inflation

The entrepreneur continued, "It's a mistake to think that a higher salary will help you become financially free faster. It only helps if the fixed costs remain the same as before or even decrease. This is exactly where the hamster wheel starts too: We get a raise and at the same time we elevate our lifestyle to a new level. This phenomenon is called lifestyle inflation.

Who wants to be financially free must live for a time according to the motto "more financial freedom less luxury". Only if you don't let your salary be eaten up by fixed costs can you save more, invest more in stocks and grow your money accordingly."

Why lifestyle inflation prevents financial freedom

Lower your fixed costs to have more money for other things is not a novelty. What interested me more in her statement is this phenomenon called lifestyle inflation. I didn't know until then that there was a word for it.

Lifestyle inflation affects everyone, rich and poor alike. It explains why a lottery millionaire spends all his money within a few years. It also explains why a normal earning family will never make it to financial freedom if they accumulate even more fixed costs with each child (new car, bigger house etc.).). Both affects lifestyle inflation.

Lifestyle inflation causes our cost of living to rise. Who earns more can afford more. It is a never-ending vicious circle and so you ride yourself steadily further into a financial dilemma. Our society is driven by consumption. Consumption is not always good and as various studies show it does not make us happier if we own and acquire more things.

Consumption is a short-lived way to find happiness. In the long run, however, this consumption leads to lifestyle inflation, which in turn kills your dream of financial freedom.

How I deal with lifestyle inflation

My income has increased 45% in the last 5 years, thanks in part to my studies as well as a change in industry. And yet, last year I made a conscious decision not to afford more than I did before.

My husband and I even moved to a cheaper apartment and I traded in my Audi for a Seat, which has made my wallet enormously happy. I could afford a Porsche today but I just don't. Exciting to see what money management does to you, not? 😊

Since I started to optimize my fixed costs I noticed something else regarding my consumption: Imagine you go to a designer store and you know you could buy some great things right away but you just don't do it. How do you feel after leaving the store??

Do this self-experiment and I promise you, you will be surprised what feeling this will trigger in you. When I leave a store today without buying anything I feel relieved, happy and somehow a bit more satisfied than I was before I entered.

What true financial freedom means to me

Lifestlye inflation is serious and it takes a bit of work to escape it. I no longer want to fall victim to lifestyle inflation and have therefore taken the first measures (today Seat formerly Audi). How about you?

In the long run it is of course not an option to never buy anything again. My Seat is very luxurious and I didn't save anything (leather sport seats, panoramic roof, black-matt special paint) and yet this car costs me 3x less than my Audi. Logically, fast overtaking maneuvers like I could do with my Audi S3 are a thing of the past. But I am amazed at the low insurance bill and trips to the gas pump have become less frequent.

Getting back to the designer store: I'm telling you, leaving an expensive store without buying anything is a really awesome feeling! 😊

My personal conclusion: Having a lot of money and still spending little, THAT is financial freedom and pure happiness for me.

How you can become financially free

If you constantly adjust your lifestyle to your income, you will never be financially free. In a first step it certainly helps to save more than to spend (wow! what a novelty!) 😉

Maybe you will like the lifestyle of the frugalists? Those who live frugally strive for early financial independence and align their lives with a frugal (simple, modest) lifestyle. You can read more about this topic here.

I can find a lot of good things in frugalism and yet this way of life is too extreme for me. As you could read in my example with the car I have very few fixed costs not reduced, but simply optimized. I have also created new income opportunities, in addition to my employment and self-employment.

I am convinced that you can become financially free even without frugalism, namely with the following approaches:

  • Consume material things that don't get you ahead in life only in bulk (z.B. expensive clothes, jewelry and other status symbols)
  • Invest in yourself: Take a continuing education course or learn something that will personally enrich you and increase your market value. Learn a new language, programming or venture laterally into an industry that has long fascinated you.
  • Save money but do not leave it on your account. Invest it in the capital market in stocks, ETF's, real estate u.v.m.

The key is to maintain your lifestyle costs as your income increases and not increase them at the same time, as 95% of people do.

Why status symbols?

Detach yourself from the desire to get a higher status in society just because you live a certain lifestyle and buy expensive things.

Prosperity is when you buy things you don't need with money you don't have in order to impress people you don't like.

You don't need to impress anyone, and it's ridiculous if you think you need to impress your friends with status symbols.

By the way, this also applies to business partners. Do you think my clients are impressed when they see me driving around in an expensive car? Probably rather the opposite! In this way I give the impression that they are paying too much for my service. Furthermore, an expensive car would be detrimental to my mission, because this would be anything but "smart with money". 😉

You should avoid people who flaunt status symbols. If your friends value it, it is time to look for a new circle of friends.

Your new motto for the way to financial freedom

You want to become financially free? Then follow the entrepreneur's advice and live by the motto "more financial freedom less luxury".

I also adapt my life to this motto a little bit every day and I don't regret it for a second. Like I said, it feels really great to have a lot of money and spend very little.

I wish you from the bottom of my heart all the best on your way to financial freedom.

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