The Rat Race: How Lifestyle Inflation is Keeping You From the Finish Line
I want you to do a thought experiment with me. Imagine you’ve entered a race. You can’t leave the race until you finish it and the course is 500 miles long. It’s going to take you at least a few weeks since you’ll be starting on foot. It doesn’t matter if you finish first or last, as long as you finish you get a prize.
Since the race is going to take so long and you can’t leave until you’re finished, there are various food and supply vendors for you all along the course. Everything is free and included as part of your participation in the race.
There’s a catch though. Each time you take an item, the distance you as an individual have to run is increased. So if you take a bottle of water, your finish line will be moved back by say 1 foot. Other items will push your finish line back even farther. Any items you take will not affect other’s finish lines and will only push your specific finish line back.
But there’s not just food and water available on the course. There are all kinds of supplies. You can take items that will help you finish the race faster such as bikes or cars. But these will push your finish line back a lot. For example, a car might push your finish line back 50,000 miles!
There are other items available simply to make the race more enjoyable such as books, toys, and games to use while you’re resting. All lodging accommodations add distance to your race as well.
Welcome to the Rat Race.
The Rat Race
Each part of the race above represents different parts of our lives. Your pace in the race represents your income. A faster pace in the race represents a higher income in life. Someone who’s jogging is going to finish faster than someone who is walking. And doing the race in a car is going to be faster than jogging.
This is the mind set that most people take in life. If they could only pick up the pace (make more money), they’d be able to finish faster. That would be true in most races. But in this race, you’re not only looking at how fast you’re going, you also need to consider where you’re going.
In this case, the finish line is retirement. The majority of folks running this race are focused on their pace, or income. As people progress in their careers and make more money, they’re picking up the pace. The thinking is that if they can just go faster, they’ll finish faster.
But we also need to consider where our finish lines are. You can think of the finish line as the amount of money required to retire. Each item taken from the race course pushes your finish line back, just as each item we purchase in real life takes away money that we could be saving for retirement.
But it’s even more symbolic than that. You see, as people start to pick up the pace, they worry less and less about the finish line. They begin to take more items from the vendors knowing full well that it will push their finish line back. But they rationalize the purchases, thinking that all they’ll have to do is pick up the pace.
Eventually, all they’re concerned with is making their pace faster and faster in order to to make up the added distance from all their purchases. Their finish lines become so far away that they see no way of finishing the race unless they continue to pick up the pace, all while forgetting why their finish lines are being pushed back so far in the first place!
This same behavior happens in real life, and it’s a phenomenon known as Lifestyle Inflation.
This race is my elaborate way of illustrating a concept known as lifestyle inflation. Lifestyle inflation is what happens when your lifestyle and associated costs increase along with your income.
The most common example of lifestyle inflation is the transition from student to full-time employee. As a student, most people get by on the bare minimum while also having an enjoyable life. Students will seldom eat out and are frugal about their entertainment options. To cut down on costs, they split the rent of already low-cost apartments with roommates, and bike or use public transportation instead of owning a vehicle.
Once these same students are full-time employees though, their attitudes and mindsets change. Instead of cutting down costs on food, they’ll eat out on a regular basis. Every weekend consists of spending hundreds of dollars at bars and restaurants. Living with roommates is no longer an option, opting instead to rent high end condos. And don’t forget about the new car. That same student that was living on a few hundred dollars a month now needs thousands of dollars to support their lifestyle.
This is the most dramatic example of lifestyle inflation but it isn’t always this obvious. For many people, lifestyle inflation creeps into their lives every year. With every yearly raise, people justify spending more and more because they believe buying more will make them happier. People will upgrade cable subscriptions, buy newer electronics, or upgrade their cars or housing. All of this contributes to lifestyle inflation and is the reason you can end up making $500,000 per year and still feel poor.
So how can you avoid lifestyle inflation? First, it’s helpful to understand why we’re so susceptible to lifestyle inflation.
It all comes from what is known as Hedonic Adaptation. As Anthony Ongaro of Break The Twitch explains, Hedonic adaptation is the ability for humans to return to a relatively stable level of happiness. What this means is that we quickly adapt to our new situations to return to some sort of baseline level of happiness.
This ability is really helpful when you go from a good situation to a less desirable situation, such as losing a job. People will generally be able to get back to their previous level of happiness by adapting to their current reality.
But this adaptation goes both ways. If we go back to our student example, they were perfectly happy living on a few hundred dollars. Once the student gets a full time job, they begin to spend more to increase their quality of life, and thus, level of happiness. But over time, as little as 3 months, the student becomes accustomed to the new quality of life and they find that their level of happiness returns to what it was before they got their job. In the end, the increase in spending didn’t truly increase their happiness at all.
Hedonic Adaptation is sometimes referred to as the Hedonic Treadmill. While on the Hedonic Treadmill, you’re constantly striving to reach a place of happiness, but ultimately staying in the same place. It’s similar to our Rat Race where people are constantly going faster and faster, yet never truly getting closer to the finish line.
Getting Off the Treadmill and Finishing the Race
To avoid Hedonic Adaptation, get off the treadmill, and finish the race, you need to avoid increasing your lifestyle costs and cut down unnecessary spending. Of course making more money will help you retire sooner, but you also need to be aware of your lifestyle costs and make a conscious effort to keep them down. It’s not just how much you make that matters, but how much you save.
When you get a raise, stop and think about if spending that raise would truly make you happy in the long run, or if you would be happier having more financial security by saving and investing it. Instead of splurging on a new car or the latest phone, consider increasing your 401(k) contributions or maxing out your IRA.
On the other side, take a look at your budget. See which areas of your life have become inflated, and cut back to a level that meets your real needs. Try eating out less and cooking more, buying generic, or downsizing your home.
You might find that you can finish this race sooner than you thought.