Low income? Lack of investment knowledge? Inflation? Financial advisor fees? What is the #1 reason that prevents most people from reaching financial independence?
If I have to choose one reason, without thinking for a second, I’d pick lifestyle creep. Lifestyle creep silently grows and prevents you from growing the gap between income and spending. The moment that you get a promotion or a raise, it whispers in your ear that you need to upgrade your lifestyle. Whether it is moving to a bigger and nicer place (which will need more stuff in it), whether getting a new car (which loses 10% of its value the second that you drive off the lot), whether get the new xphone (the design is so innovative, you can’t even plug in your headphones anymore so you need to buy a new dangle to make it work). You got the idea. Before you know it, your expense base has gradually increased and the surplus between your income and expenses didn’t grow, at best. Chances are it shrank even further.
But it’s not over yet.
Now that you are used to this new lifestyle. It will feel like a failure to cut back from it. You will work even harder to maintain it. You now have more responsibilities at work which leads to more stress and less free time. When you get another raise, you repeat the cycle above. As you get tied to the hamster wheel tighter and tighter, you are getting farther away from financial independence since your expense base keeps growing out of proportion to your net worth.
One of the drivers of this dynamic is how we measure wealth and financial wellbeing. When I was growing up, I was always told that the best indicator of how wealthy you are is how much you make. I haven’t really internalized the term “net worth” until I started researching early retirement. I know many people living in Silicon Valley earning over $200k and almost living paycheck to paycheck. When you look from outside, they live a rich life. They drive Bimmers, Porsches, and Teslas and live in nice places while they are terrified about the possibility of losing their jobs. They inflated their lifestyle to a level that they have minimal buffer for unexpected events, let alone having any control on how they spend their precious time or getting any progress towards financial independence.
I was one of them.
It’s embarrassing to admit that I worked in banking and finance related roles and had no idea about personal finance. Coming from a family with limited financial means, I really enjoyed the fact that I could afford to buy a BMW and I bought it. It felt like success. I didn’t start a 401K plan for a long time since I thought that you can’t become rich by putting aside just $20K a year. I was spending half of my paycheck to live in a nice and expensive neighborhood in San Francisco. I was eating out most of the time, I was a member to a gym with fees over $200 a month, I was going out to grab drinks with friends a few times a week ($15 craft cocktails yummm) and I had a triple digit $/month phone plan. Whenever I traveled, I stayed in expensive hotels, ate at pricey restaurants. During this period, I was comparing all these expenses to my income, and I was thinking that I could afford them since my income was covering these expenses most of the time.
Living the life, right? Wrong.
Something was bothering me inside. Whenever I look at my bank account, I was not seeing any growth. I was basically living paycheck to paycheck. I was dependent on the income to be able to cover my inflated expense base. All my savings were kept in a checking account since I thought the stock market was too risky, and if I stopped earning money, my savings would cover 4-5 months of expenses. I had no investments beyond that. On top of this, I had debt over $150,000 (of course I was only making the minimum payment every month).
When I look at that picture now, I feel terrified. If I kept the course, I probably would’ve some developed some health issues because of the stress. I would feel trapped without a way out. Every year that passes, higher my risk would be as it takes time for savings and investments to grow. As I get older, I would be under immense pressure due to the increased risk of job loss in this competitive market while not being financially ready at all for retirement.
I am very fortunate to come across FIRE timely and be able to get my shit together.
The good news is once you decide to make the change, you can execute on it very fast. You have to be ready for the emotional challenges. You will need to downsize your inflated lifestyle which will feel like stepping backwards. Remember that most people who live fancy lifestyles belong to the group that you and I were in. Once you start seeing the accelerated growth in your net worth, it will give you all the confidence that you need. As you get closer and closer to financial independence, you will probably realize that you actually enjoy being mindful about your spending and consumption habits. There is a 99% chance (highly scientific number) that you will even be much happier like most of us who are part of the FIRE club 😊
You are probably wondering how will you know when you reached complete financial independence. Here is an article explaining it and more: How can I know if I have enough to call quits? Can I really become a millionaire?
Please feel free to drop a comment below if you relate to what I’ve discussed above and share any tips that can help others in destroying the lifestyle creep!