Why I’m Baking Lifestyle Inflation Into my Coast FI Plan

0:00Evan is 25, he's extremely frugal, and he has no intention of living like this forever. So instead of pretending that his spending is never going to change, he's actually building lifestyle inflation into his Coast Fi plan. And in this episode, Evan and I are going to talk about why spending more over time does not have to derail your financial independence, how it's predictable, and how he's going to plan for that increase, and why being intentional about future lifestyle inflation might actually make his financial independence plan much more realistic.

0:34What's going on, everybody? I'm Scott Trench, host of the BiggerPocketsMoney podcast. And here today with me is my co-host, Evan Lawler. Evan, welcome to the BiggerPocketsMoney podcast.

0:43Evan Lawler:Hey, Scott. Thank you so much for having me on. I am so excited to talk about this today. I love it. Just to frame this from my personal perspective, when I was 25, I was spending probably two and a half, three grand a month living for free in a house hack or whatever. And I was like, my financial independence number is easily$40 ,000 a month in spending. And that was a true answer at that point in time. And today, you know, with a family, I would almost certainly not be spending, you know, two and a half,$3 ,000 or, you know, four or$5 ,000 even adjusted for inflation today in the greater Denver metro area.

1:15So is that kind of at the highest level how you're thinking about this? How do you think about lifestyle creep with respect to your Coast Fi plan?

1:22Evan Lawler:Yeah, that's 100 % true. And I'm in the exact same boat as you were that I'm spending $3 ,000 a month on the upper end. Probably on average, I'm closer to$2 ,700,$2 ,600 a month. But I get the opportunity to learn from other people in the financial independence community and the fact that I've seen lifestyle kind of grow over time. We can call it lifestyle inflation. And so I'm just building that into my plan, understanding that that's likely to happen, and I'm okay with it. Let me ask you about lifestyle inflation in the context of a 25, five, 26 year old right now, what would spending more look like in terms of bringing happiness or fun into your life right now?

2:00Like if you had imagined you up your budget by a thousand bucks a month, what would you actually get out of that in today's context at this age?

2:06Evan Lawler:Today's context, if I were to spend a thousand dollars more per month, maybe I would upgrade my apartment. Maybe I would potentially upgrade my car or just spend more with my friends and family, going out more, going to more concerts and events, things like that. Okay. Do you feel like you are explicitly not doing the concerts and events in order to save money right now in particular? I would say I limit them and I'm definitely conscious when I'm considering what am I going to do this weekend, but I try not to exclude them entirely. So I'll still, I'm in Philadelphia. I'll still go to a Phillies game.

2:41Evan Lawler:We went and saw the Flyers last year, maybe even an Eagles game, but that would be a splurge. Okay. So does it feel like a sacrifice on a regular basis? It doesn't feel like a sacrifice. I think that it feels like a balance. And there's certainly times where I have to step back, especially with our apartment or something like that. But it doesn't feel like an explicit sacrifice that each month I'm like, oh, I wish I had done more. Definitely not. I thought it might be interesting to just check out the numbers for the greater Philadelphia area for a single person aged 25 to 34 and see what that person spends basically on a monthly basis here and see how you're doing compared to that.

3:19Evan Lawler:That would be awesome. I'm definitely interested in hearing that. Okay, so this is a budget calculator I built. I merged various data sets. Some of them are old data sets. So I've applied inflation adjustments, depending on how old the data set is. I've merged childcare and all that kind of stuff. But in the greater Philadelphia area, let's do Philadelphia, Philadelphia, Camden, Wilmington, Pennsylvania, and that area, a single person age 25 to 34, you're on the young end of that, so you'll probably be at the lower end of this range, is spending about$4 ,800 per month across all of the consumption categories that we track.

3:51in the middle income quintile. The bottom income quintile is spending about$2 ,500 a month. So that's right about where you're ending up with your spend right now. Note that this does include FICA, so Social Security Medicare tax. So I have the option to exclude that. Let's exclude that for these purposes because you're probably paying more than that given your income. But that's about $2 ,500 a month. So you're spending like someone who's earning in the bottom fifth of earners in the greater Philadelphia area right now.

4:19Evan Lawler:Is that about how you would perceive it? Yeah, that's spot on. That's basically exactly what I spend on average. Some months are a little higher, some months a little lower. Okay, awesome. So one question I'd have is, let's say that 10 years go by and you get married and have two kids. You're still in the greater Philadelphia area. Do you think at that point you would continue to spend in the bottom quintile per month? You know your spending is going to go because there's more people in your household, But do you think you'd spend in the bottom quintile or do you think you'd move towards the median?

4:47Evan Lawler:I think that I would begin to move towards the median because my spending now is totally intentional to build more financial freedom and flexibility in my ability to spend more. And I think that it's on average if you're earning a lot of money, it can be tempting to want to spend more of that money. So I would expect that as I get older, I'll be spending more and moving up in those quintiles. Okay, awesome. So let's move you into that quintile right now. Have you ever done this before? Have you ever actually projected? I've never done this before, so I'm very interested to see what this is going to be.

5:18Okay, now I'm making you a couple with kids. I'm going to make you age 35 to 44 because 10 years have gone by, right? And we're going to put you in the middle quintile. Now we're spending$7 ,200 per month. Oh my gosh. That's the challenge, right, in a nutshell, because I think many people begin their financial independence journey in their 20s, right? Single, in their 20s, very early in the journey. And what you're doing is very reasonable. I was doing the same thing adjusted for inflation and location in Denver at age 25, like spending in the bottom quintile for my age bracket while earning as much as I could across that time.

5:55And then, you know, it changes. You just move towards the medium.

5:59Evan Lawler:That's amazing. And Scott, I'd love to ask you, as you have pursued financial independence, someone who started in their 20s and is now in their 30s. Have you seen your expenses grow over time? And have you moved up those quintiles? And can you tell me a little bit about that? Yeah, absolutely. So my journey was taken, obviously took place in the Denver Aurora Lakewood Metro. And at age 25, you know, I was probably spending similarly in your ballpark, somewhere in the 2 ,600, maybe up to three grand. So maybe just above that bottom quintile and spending back in 2014, 2015, that kind of range. And so that's where I started.

6:36And then now today, you know, I look at a couple with kids for a four portion household age 35 to 44. And, you know, in the middle quintile, now that spending is$7 ,800 per month. Oh, and by the way, if you both work and put your kids in daycare, that spending number jumps to that number, at least during that period. And that's a that's a real choice or trade off people have to make that numbers being$11 ,600. Sorry for those who are listening to the podcast that I did not read this number. So that's a huge jump, right? To go from$2 ,500 a month and spend to$11 ,600 as a median spending profile for a household of four.

7:17I think you're going to have much cheaper daycare in the greater Philadelphia area than we do out here.

7:22Evan Lawler:I think so. But let's turn that on for you. Yeah. So your spending will go, if you have a similar journey, and move across this somewhere from the$2 ,600 a month ballpark per month to$9 ,400 per month, inclusive of child care, which is about 40 % cheaper than it is in the greater Philadelphia area. So how do you think about those numbers? What's your reaction to this? I'm so lucky because I get to see what is coming out of the financial independence movement. People like you who have started your financial independence journey and saw how even someone as disciplined as you and someone as motivated as you to achieve financial independence is not going to try and maintain a$3 ,000 per month spending category.

8:04Evan Lawler:And it's a natural thing to want to increase your lifestyle over time, especially someone who is high earning, who is achieving financial independence. Great. You have all this independence. What do you want to do with it? What kind of hobbies do you want to pursue? What kind of events do you want to go to? So I'm so lucky that I get to kind of see that because then I can build it into my plan from the beginning and realize that lifestyle inflation is not necessarily a bad thing. It's just something that you need to manage and potentially plan for if it's something that you expect to happen. When you're ready to start your business, Northwest Registered Agent helps you do more than just file paperwork.

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11:10That's 50 % off your first year at monarch.com with the code pockets. What is fun about building the data sets here is because, you know, you have your own view of how things ought to work when you're in the journey, especially I think early in the journey, right? Like at 25, I was so right about it. It was like, everyone should be doing this. I don't get it. You know, now I've had the privilege of talking to almost a thousand people just on this podcast about their journeys. And you can see, it's just, it's just different depending on what your circumstances are, right? So if you start in the bottom quintile, and let's say you weren't going to get married or have kids, you're just going to be a single guy for the next 20 years, next 30 years, or your whole adult life.

11:52Well, now you're spending, even if you move to the middle quintile, will go from$2 ,500 a month to$4 ,700 a month. That's not that large of a jump. It's still almost 100 % increase, 80 % increase in spend over that time. But that's much more manageable. And the concept of lifestyle inflation seems very, very, you know, you could be flexible, right? It's one thing if you, if things don't go well or, you know, the journey gets harder than you think just to keep spending at the bottom quintile for yourself. It may be an entirely different decision for you and your spouse to take your two kids and spend at the bottom quintile when the cost of moving to the middle quintile is simply delayed financial independence.

12:35That's, I think, the challenge that people go through in life here, and that's what the data can help you plan on, right? You have a very clear financial independence journey or Coast Fire journey at this level of spend. And I think you intuit this data set very, very nicely into your plan based on what I understand in terms of thinking, yeah, my spending is going to go up. I don't know how much exactly how, but I'm going to plan on this number increasing drastically over the course of my adult life.

12:58Evan Lawler:I think I've seen that a lot in different people that I hear from who are starting out to pursue financial independence. They're kind of starting with the end in mind as far as like, OK, I'm spending 30 grand now per year. But when I'm 50 or 60 or even in my 40s, if I'm working towards financial independence, I'm planning that I'll spend much more. As someone who is deeply ingrained in the financial independence community 10 years ago, was that the case? Were people planning ahead in that way or was lifestyle inflation seen as something to be avoided at all costs? Great question. I think my recollection – this is hazy.

13:34We're looking at about 10 years. My recollection is there was a lot more of a pride in maintaining a low number across the entire journey as almost like a worldview and a point of identity inside the financial independence movement. And I think that that has evolved and very painfully so for many people who basically I think of myself as a minimalist or as someone who is very frugal. And now as a multimillionaire, I'm grappling with several pressures at once. The realities of supporting a family in a median spending context in a major metro is one. Two is I have, it actually worked. Like I built wealth over the last 10 years.

14:15And now there's a really good body of discussion out there saying you should spend more, right? The goal is not to die with the maximum possible pile, so I should spend more. The next is I don't really identify as someone who is very well off and feel very uncomfortable with very lavish expenditures. So I think many people in the financial independence world are going through some combination of those and other feelings about this dynamic. I think one of the more common ones I see from people my age in their mid-30s with a young family is just the total disbelief about how much more they're spending per month than they did at the beginning of their journey.

14:54I also think that many, many people on the FI journey, not many Americans, many people on the FI journey can handle that. They're still uncomfortable with it, but they can handle it because they did put in that work over the last 10 years or have the luck of starting that journey in the last 10 years or however you want to phrase it.

15:09Evan Lawler:And I think that element of hyper frugality is so practical when you are starting out in the financial independence journey. It's something that I'm doing now. But I think it's the level of difficulty and the amount of work that it takes to be in that hyper frugal category, even if you're someone who's predisposed to be in that category, is that it does become a part of your identity. And I think that you characterized it really well that it's like there are people in the FI community, you know, even Mindy, for example, has talked about like you work all this time to become financially independent and you're rich and you look down and you go, OK, well, am I going to do the same things that I'm doing before?

15:47Evan Lawler:Am I going to skip guacamole when I go out and get a bite to eat? Right. Because I'm hyper frugal. So I think you captured it well. One other thing that I think is interesting on this is this is a perspective problem. You're 25. I'm 35. That's this part of the journey. But I think a number of people I talk to, BiggerPocketsMoney, come in and they say, I'm a couple with kids spending at the middle income quintile. But in a few years, I'm going to be a couple with no kids and my spending is going to go way down. How do I think about that and bridging those last few years to that gap or transitioning there?

16:20So that's another component that you start to become aware of. You're thinking, I got to get way ahead. My spending is probably going to go up. I should be concerned with these numbers to some degree, at least. I've been planning around that because there is a real case that could happen in my life. It could also not happen. But then I think there's the other part of it, which is that's 20 years, but my life might be 60 more years where I don't have to support that level of expenditure. So I think that's an interesting one, which I have not yet fully grappled with for myself or for the community here.

16:52All I think is the beginning of answering this question starts with data and averages, because I think it's too large a bet for many to bet that you will spend in the bottom quintile your entire adult life. Not for everyone. Some people really know that, and that's great for them that they want to be there. I think that that is the implicit bet many make, and I think that that's a very dangerous one to be all in on unless you're one of the people who are very sure about it.

17:15Evan Lawler:I totally agree. And I think it's dangerous. And I would also say it's tempting in a way, because when you're running those financial independence numbers, whether it's traditional FI, lean FI, fat FI, coast FI, whatever it is, if you can reduce your expected retirement income, your spend, we all know what that does to the numbers, right? Like if you can shave off $50 ,000 from your expected spend, then you can really make a huge impact on how far forward you can pull your FI number. But I think that you're totally right that you have to make an informed decision there. You have to make an assumption.

17:54Evan Lawler:If I could assume now that I'll continue to spend an inflation-adjusted$36 ,000 for the rest of my life, I mean, I'm way ahead of the game here, right? But I think that that's not a fair assumption, and I completely agree it's too big of a bet. Yeah. Let me ask you this, Evan. Let's say that you get more nuances in data here that I think are interesting for the application to the financial independence community. Let's say that you do get married and have kids, I mean, 35. Do you think that you will spend$1 ,300 a month, which is the median for this household, a four-person household, do you think you'll spend, I guess,$1 ,300 a month on transportation costs?

18:31Or do you think you'll drive a car that is significantly cheaper than that and keep that cost much lower?

18:37Evan Lawler:I don't think that I will be spending$1 ,300 a month on transportation. Knowing myself and knowing my situation, I would imagine even as my lifestyle inflates, I'll still be driving a very reasonable car with a lower cost than that. That's a great one to go line by line through data averages and say, you know what? Like the average household with kids in daycare in Philadelphia, middle income, is spending$9 ,400 a month or$110 ,000 a year. And by the way, you're probably underwater. Because median income, I think, is going to be slightly lower than this. I think that's why this is among one of the hardest ages, I think, for people, especially if you have kids in daycare, because of that daycare expense.

19:14And these years, I think a lot of people really struggle. I think it's really hard on a lot of families. But anyways, in that period, that's where you can spend. And I think that the FI community is very unlikely to move into that period spending the average on cars. which I think is a very avoidable expense that probably doesn't have the same impact on your lifestyle. You may want a safe car or something that's not too old, but I think you can get there for much less than$1 ,300, which is a really high number to me.

19:38Evan Lawler:I totally agree, and I think that as we're looking at this data, and as you mentioned, it's a difficult time as far as spending for someone in the financial independence community. and this is one of the most compelling cases I see for a coast fire approach rather than a traditional fire approach because it lends itself I think well to the human condition right that like when you're first coming out of school at least in my case and the peers that I see around me you know like if you went to college and you find a good job that that has a pretty strong starting salary then you can put away lots of money and keep your expenses super low me and my friends call it living like a college student, right?