How ‘lifestyle inflation’ gets in the way of financial independence
There’s the inflation we can’t control, and then there’s the kind we can control, says one financial coach.
“Lifestyle inflation is increasing your spending at the rate at which your income increases… if it remains unchecked, lifestyle inflation can prevent you from reaching your financial goals. It keeps you in the cycle, unable to pursue dreams because you need to continue to work just to pay your bills,” writes Jason Vitug in his 2016 bestselling “personal finance for millennials” title: “You Only Live Once: The roadmap to financial wellness and a purposeful life.”
The familiar phenomenon is also known as “lifestyle creep”, and has been covered in other books and articles, adding to the ever-growing canon of relatively easily accessible personal finance advice – be it adverts and billboards urging us to sign up for some investment to secure a better future for ourselves and our families; finance savvy talking heads sharing their expertise on television screens; or numerous websites and twitter accounts sharing tips on how to manage money and live within our means.
Yet, for many of us who are gainfully employed and arguably in a position to put some of this ubiquitous financial wisdom into practice, we still find it far harder to save than to compulsively buy the latest and greatest version of whatever we’re into, be it a pair of designer sneakers, a “pro” smartphone with a gazillion pixels promising to help us capture cinema-worthy Instagram stories, or the smartwatch that tracks how many hours we sleep and then monitors and quantifies every little bodily function in our waking hours.
And it’s not just big purchases that eat into our monthly earnings and potential savings; there are also the subscriptions and life’s other comforts that we buy into when we feel we have additional income.
That said, detractors could argue that it is something of an oversimplification to blame the ubiquity of hand-to-mouth living among the employed, on personal choice in the form of preventable lifestyle inflation, and might rather point to many documented flaws of economic systems that benefit from an underpaid labour force to produce these very items that result in increased “unnecessary” spending.
Zoe Merson-Davies is not one of those detractors. She is a certified financial planner with nearly three decades of experience, and an independent financial coach. She strongly believes we can all make the kind of decisions that can help us “build wealth”.
Personal finance is an emotional journey
“My multiple life experiences have taught me so much that helps me in my coaching. I’ve been married, I’ve been divorced, I’ve bought and sold properties. I’ve had dread diseases and had to claim from insurance policies, I’ve been broke, I’ve had debt, I’ve gotten out of debt, I’ve built wealth,” says Merson-Davies.
Beyond her occupation and her formal qualifications, she says it is these life experiences that give her insight into the many pitfalls when it comes to handling personal finance.
“There’s a lot of emotional stuff around money and one’s relationship with it. The first question to ask oneself is, ‘why do you want to buy those things?’
“If you were earning R10,000 and you were living just fine and able to cover your expenses, and then suddenly you’re earning R15,000, rather carry on living within your R10,000 budget and save the difference,” says Merson-Davies.
Financial independence may look different for different people, and we might even use different words to describe it: comfortable, rich, wealthy, etc. The straight-talking financial coach is clear on her preferred words: “wealthy” and “rich”, as a goal to work towards, and as descriptors of her current circumstances.
She is also unequivocal about what financial success isn’t; in particular, that it isn’t about external symbols of success.
“We might see and believe that people who run around in [designer sneakers] and have a four-bedroom house and drive a fancy car are rich. In reality, they’re likely up to their eyeballs in debt.
“Being rich is not the visual – it is in your savings account, in your bank account… it’s what is going to pay for the day when you are no longer earning a salary,” says Merson-Davies.
Hence, she believes it is first important for people to unpack their beliefs around money, wealth and status symbols, as that will ultimately guide the choices they make.
And one particularly troublesome belief she comes back to, and mentions often, is the mixing up of financial success with external material symbols of success:
“My friends, my partner, and my family care about who I am as an individual, not the shoes I’m wearing. If your friends are based on what shoes you’re wearing, and what car you are driving, what is the depth and value of your friendship?”
One method she recommends to protect oneself from unnecessary lifestyle inflation by making impulsive buys is by “facing reality”. You may want that Apple Watch that costs north of R10,000, and you may be convinced its many health features will help you exercise more, “but will it really? Will it lead to more activity than another, much cheaper fitness tracker?”
Merson-Davies asks, “Do you need to upgrade to the latest top-of-the-range phone? Did you do all the things you thought you were going to do with the previous expensive phone upgrade?
“Life is about making choices. And if you want to build wealth, there is no way around it – you have to save your money and allow it to compound,” she adds.
Green light, now begin
That said, the process of identifying and working through these beliefs doesn’t mean one can’t get started on working one’s way towards financial independence.
In fact, she recommends getting started on savings immediately, by putting money, no matter how little, into an account such as a 32-day account, while continuously educating oneself about money.
“Even if it is R50 or R100, keep saving. Then start learning… start empowering yourself and building an understanding of how money works so that you can then make different decisions with your money down the road,” she says.
Understandably, the world and language around money can be quite intimidating, and Merson-Davies emphasises that, as with other life skills, it is important to approach this as a journey of learning.
“Many people who build wealth don’t instantly know how to make money. They just know they must save, and then as life goes, they learn – they ask questions, they engage: ‘What is an ETF? What is an RA? What is a tax-free savings account?’
“You will never really understand money unless you learn about it and empower yourself, so that you can make bigger and better decisions. Even with 30 years of working in finance, I’m still learning, and I’m still building my emotional maturity around money,” says Merson-Davies.
Just do it!
The choice to opt out of buying the latest and greatest might sound easier said than done, but for Merson-Davies, there’s no sugar-coating it:
“When you start working, you become an adult. So grow up and become an adult!”
The way she sees it, getting into huge debt for fancy cars and clothes is a form of emotional immaturity, and she readily admits that she too has fallen into the trap of approaching financial decisions with a certain level of emotional immaturity.
To get the help she felt she needed, she consulted and continues to “work with people who are rational around money… those people who have emotional maturity, people who I trust implicitly to bring me back down to earth to guide me to make a rational and less emotional decision.
“I know I get emotional, so I stop myself and acknowledge that I’m emotional about the decision, and I reach out to those people and ask them to help me. It’s also about allowing yourself to be vulnerable,” she explains
The eighth wonder of the world and money babies
“The next step is to understand compounding; it is the eighth wonder of the world,” says Merson-Davies, referring to compound interest.
Simply explained, compound interest is a combination of the interest calculated on the initial savings, as well as the interest from the interest.
“Think of a snowball – the more you roll it in snow the bigger it gets. Understand that money makes money,” she emphasises.
“Work does not equal money. Right now, I work and I earn a salary. But I also have money invested that is making an investment return. I am no longer working for that money, but that money is making money babies,” she says, adding that even though she hasn’t had a salary increase in the last three years, partly due to personal health challenges, she is richer now that she has ever been in her life due to the money she saved and the compound interest on that.
Says Merson-Davies: “I wear clothes I’ve owned for 10 to 20 years. I drive a tiny little car. But I save nearly 80% of my income.”
A few months ago, we published an article about what to do when you’ve left things too late. Lindsay Frost, the advisor interviewed for that article, acknowledge the disadvantage of having missed out on a significant amount of compound interest by not saving and investing earlier in life.
However, she was very clear that no matter how late, saving is always a good idea, and even those with single digit years left until retirement would still benefit from saving – much more so than if they hadn’t. Merson-Davies shares this view.
“Forgive yourself. It’s okay, maybe you’re left with 10 years or less to retirement. Go ahead and save and see what happens. You’ll still have something rather than nothing. If you’re going to continually live in fear and not take action, you’re never going to move forward.
“Every rand saved counts!” DM/ML