I truly believe the most important factor of early retirement is the ability to save a large percentage of your income early on. To do this, we need to keep lifestyle inflation down to a minimum. Just think back to when you first graduated from college. You didn’t need to spend a lot of money and life was good. As we get older, we take on mortgages, new car payments, and have children. Life inevitably becomes more expensive. Most families spend all their income because they got caught up in the consumerism lifestyle. As they make more money, they also spend more money and don’t have enough left over to save. Lifestyle inflation is the enemy of financial freedom, but it is inevitable.
Unfortunately, there are more things to spend money on every day. It seems every year, more things become a necessity. Family situations change and we need to accommodate life. I have been keeping track of our cash flow over the past 2 years and I see our expenses creeping up. 2 years ago, I budgeted $4,000 per month for expenses and now we need to increase that. This is a very important lesson because it shows that we need to keep increasing our income in retirement to keep up with inflation. Luckily, our income rose at a higher rate than our expense. We need to keep that up to make sure we can maintain our lifestyle which is not luxurious by any mean.
Here are some new expenses that we didn’t have when I quit my job.
I became a stay at home dad when I quit my engineering career and I eliminated the childcare expense from our budget. At the time, I thought he’d stay home until he starts kindergarten. It didn’t work out that way though. I need more time to work on my blog and he needs to learn to socialize with kids his age. We just started preschool in November and we need to include this cost into our budget. Actually, 300 bucks is a small price to pay for sanity.
Gym membership +$27 and childcare +$20
When I was working, I went to the company gym at lunch almost every day. I tried to work out more at home or at the playground when I became a SAHD, but it just didn’t work. I gained 5 lbs over the last 18 months and became much more rotund. Now that RB40 Jr. is more mature, he can hang out at the gym childcare center while I workout. It’s really nice to get back in the gym again, but it is an additional cost.
Life insurance +$24
I had life insurance with my old employer before I retired. After I left, I had to get my own policy. I think everyone should get their own life insurance instead of going through their employer. When you’re young, you can get a life insurance policy for a low premium. If you wait until you leave your job, then it will most likely be more expensive to get a policy.
Smart phone +$21
I just got a smart phone through Republic Wireless this year. Previously, I used Tracfone just for voice calling and texting which cost about $20 every 3 months. Now, I need to be able to check email and Retire By 40 when I’m out and about. Republic Wireless has one of the cheapest smart phone plans you can get, but it’s still an additional expense. Mrs. RB40 is still with Tracfone because that’s all she needs.
Grocery inflation +10-20%
The government said inflation is 1% in 2013, but groceries seem to have gone up much more than that. We will also try to eat more organic fruits and vegetables next year and that will increase the cost even more.
More Driving +$40
When I first became a stay at home dad, we only drove about once per week. Now I’m driving almost every day. On the weekdays, we either drive to preschool or the gym. I guess I should get used to it because it seems every parent is always driving their kids around to their soccer games, martial arts classes, or birthday parties. All this driving around cost about an extra tank of gas per month.
More Travel +?
Now that RB40 Jr. is able to fly with minimal fuss, we will be able to travel more. We went to visit family in California 3 times this year. Next year, we plan to take a trip to Hawaii or Mexico. Travel hacking will help lower the cost, but it will still cost more than just vacationing within driving distance. In a couple of years, we’ll head off to Thailand and other international destinations so that will cost even more. It will be a lot of fun to travel with the kid, so I’m looking forward to it.
Are these lifestyle inflation costs unreasonable? I don’t think so. We are not buying more luxury items or spending money willy nilly. I will increase our monthly expense budget from $4,000 to $4,500. Luckily, our income also kept pace with the increase during that period. It’s mostly due to the higher than expected online income so I need to keep improving my blogs. I’ll increase our income budget from $5,000 to $6,000/month as well. I’m also hopeful that 2014 will mean higher income from our rental properties, so our passive income will also increase.
Inflation is inevitable so we need to make sure our income also keeps pace. When you retire, you need to have a plan to increase your income every year.
What about you? Have you been able to control your lifestyle inflation?
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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