Turning Lifestyle Inflation into Lifestyle Deflation

In my earlier article on Managing your Lifestyle Inflation, I mentioned something which Karen Datko at Smart Spending seemed to click with. She said:

Andrew suggests that you look at expenditures you started making after your pay went up. "If you didn't have these things before, then you can probably still do without them now," he writes.

That was just a small part of my previous post but it is an interesting one. Essentially by sticking to your same budget, even after you get a pay-rise, then you are recognising this extra income for yourself and actually paying yourself first before adding to your lifestyle expenses. By swiping the extra into your savings account and not spending any more than before then you are managing your lifestyle inflation.

Lifestyle Deflation

Photo: cmatsuoka

More importantly though, you also need to look at downsizing your lifestyle too. There's no point just starting from now and saying "When I get future pay-increases, I won't spend that", it actually needs to start before then. After all, maybe your lifestyle expenses are already too inflated ... usually this is the point at which you're spending everything you earn or even worse and spending more than you earn.

Instead, you should review your life as it is now. Look for the simple things you can remove and also go over your regular expenses to see which you can cut down or at least cut back on. I mean things like whether you increased your cable subscription to include more channels the last time you got a pay-rise. Do you even watch them? I bet not.

Expanding your Savings Range

This year I managed to get a pay-rise but instead of spending more, I actually started removing a number of (unnecessary) things from my life. The latest item I removed was my car seeing as I hardly ever used it. In total, I think I'll actually be up around $200 every single month now that all those car expenses are gone.

Both my pay-rise and my ability to cut out unnecessary things are actually expanding my savings range. I'm spending less of what I earn and therefore saving more. I'm also earning more than before and my savings increase there too. It's funny since I don't miss anything I cut out and instead I have replaced them with other more frugal activites.

When the Economy Improves

Karen also suggests something which should also be added to this list of things to do. Firstly, we're not succumbing to lifestyle inflation, in fact we're actively managing lifestyle deflation and to add another thing into the equation, especially for the current environment, Karen says:

We suggest that if you're cutting back in anticipation of the worst, you consider carrying that new budget forward when the economy improves (and it will).

With an improved economy, you may think that we are out of the woods and home-free but in reality it's still a long way to go to reach your prosperous and financially independent future-self. So instead of madly spending like others will when the economy is looking brighter, just quietly go about your usual still frugal way of life. And instead of reveling in the spend-happy new environment just take a moment to revel in the new and improved ways the new economy will help you save even more money and further reduce your lifestyle expenses.

P.S. After writing this article, I found that The Tao of Making Money previously mentioned Lifestyle Deflation in an article back in Feb 2008, though I can't find any other references to link to.

Any others articles about 'Lifestyle Deflation' you know about? What are you doing to actively manage your lifestyle expenses?

Choice Between a 4 Day Work Week or More Money

As I have stated before, I am aiming to achieve my goal of retiring at 40 whilst at the same time working a four day work week. Yes, I know it's insane but it's good to have goals.

Besides, if I miss it at 40, then I'll probably hit 45. But that figure isn't the most interesting one. To me the most important figure above is that I'll be doing it whilst working a four day week.

Initial Thoughts

Photo: joelanman

My four day work week started in September and almost as soon as I started doing it, I was blown away by how good I felt. I decided to take Wednesdays off to split the week up and just the thought of only ever working two days on the run, before having at least one day off, was probably the best decision I ever made.

I had various detractors including people saying "but then you get two Mondays" to which I counter "yes, but you also get two Fridays!" And besides, all the people I knew who took Fridays off wanted to have a long weekend so they could go away every now and again - unfortunately, they never did.

However, no-one said that a four day work week was bad and in fact, a good percentage of people started thinking whether they could do the same.

As it turns out, Wednesday, for me at least, turned out to be a magical day. Almost like going to Disneyland every week - it was a dream come true.

A Change of Lifestyle

Early on I realised that my life had changed quite dramatically. I finally had more time to do things. being able to cook more often, eat better and exercise more has been refreshing and of course, the ability to do other things I enjoy, like walking, cycling and taking photographs meant I was distinctly happier than before.

It came at a cost though and that was a financial one. My pay was instantly 20% pro-rata lower than it should have been. In reality it really didn't bother me as much as I thought it might since I had already altered my lifestyle enough such that I'd stopped spending enough money on frivolous things that it actually cover this difference. On reflection then I was no worse off than before (luckily I'd also had a pay-rise a few months earlier which also helped).

It Lasted Two Months

You might be able to guess that my four day work week is no longer - temporarily - but for the moment it is but a dim and seemingly distant memory. At the start of November, work asked me if I could go back to five days a week until the end of the year. It is only two months and I knew the question was coming anyway so I happily said yes since I like to think I'm quite agreeable in these situations...

...not that I knew what I was letting myself in for.

The first week seemed to go quite fast, the second a bit slower and now, in my fourth week back at five days, life seems to slowly grind onwards ever inching towards that singular Friday when I finally get time to myself. It's not so bad but I have already realised that my life is the worse off, in a number of different ways, for it.

I have less time, my diet isn't as healthy as it was, my exercise routine has waned and I feel a little more stressed about a number of things. I certainly have less time to do bits and pieces as you'll have noticed by the dip in the number of posts in November.

Time Deficient

Now, I'm sure that there may be some readers who'll be saying "We've all got to do a five day working week so just live with it" but here's my case as to why I need a four day work week (and not just for mental reasons).

As a single guy, I inherently get less time than couples do (and here, I mean couples with no kids - couples with kids certainly get less time to themselves than I do). Let me justify that by saying for my situation, I'm the one who has to tidy the house, I have to do the shopping, I have to cook for myself, I have to do the washing up and the washing, I have to pay the bills and talk to the bank/utility/phone companies. Oh, and I also have to earn a living. With couples, they can at least share a number of these chores.

A number of my friends go out cycling while their partners shop and cook. While they clean up afterwards, their partners can get on with other things. If both of them tidy up, it takes half the time and in some cases less.

So you see, by having that little bit more to do what sometimes feels like an infinite number of chores really helps. This way I can at least spend proportionately more time doing the more feelgood activities like recreation or hobbies.

The Extra Pay

When I started back at five days, I knew I would probably enjoy getting my increased pay-packet but in reality, what I got extra - whilst significant - doesn't really compensate for all of the negative things I have already been feeling whilst back up to five days. I'm usually a happy person, and that's still the same, I'm just not as happy as I was in September and October.

I knew that over these two months I would switch my thoughts between sticking at five days (to help my finances and retirement plans) or four days (to enjoy life a little more) and wait until the New Year to decide which I wanted to stick with, but I think I have already made up my mind.

I shall go back to a four day work week come January and not care about the extra money. It's a call between my head and my heart and unusually for me, whilst my head has invariably won in the past, this time my heart has won out by a large margin.

As one of my friends said to me a few years ago "You can always earn more money but you can't earn more time". And that is why I shall go back to just four days in the New Year.

I'm curious as to what you would do, so if you were in my situation, what would you choose? Please explain.

Are you Managing Your Lifestyle Inflation?

Have you ever heard the one about the graduate student who ate beans on toast for 4 years whilst completing his degree, accepted a top-class job with high prospective pay increases but even after 10 or 15 years of working never seems to have any more money in the bank than he did when he was studying as a poor lowly student?

Okay, I made this person up but the reality is that most of us know one or two people who are exactly like this. They are earning lots of money, in some cases more than you, but they never seem to actually have any. Yes, they have great cars or a big fantastic house but they always complain about owing so much on maxed out credit cards.

This could also happen to you if you're not careful. You see, these people are victims of Lifestyle Inflation.

What is it?

Photo: sis

Lifestyle Inflation is something that happens to all of us at one time or other. It happens when we start working, it happens when we get a pay-rise and it can happen at almost any other time of our lives too if left unchecked. It's that function of our income which makes us say "Hey, I can afford that because of my new pay-rise" so you go out and spend the extra money on that new 'thing'. Because ... you know ... you're worth it!

It also has another phrase, one that is probably more well known than Lifestyle Inflation. It is also know as:

The more you earn, the more you spend.

You've definitely heard of that one.

Now, I want you to sit back, relax and have a think about what you did the last time you got a pay rise. I'll wait right here until you come back. Think of a few things. To help you out, you might want to consider whether you:

• treated yourself to a nice meal out
• splurged on new clothes, make-up or shoes
• subscribed to another magazine
• raised your cable subscription to the next level up
• increased the amount you set aside for socialising
• went out and bought a new car

If you can tick a few of these or maybe you have some of your own, then you are inflating your lifestyle.

So what? I deserve it

Of course you deserve it, you work hard for that money. That increase didn't come without having put those extra hours in, being good at what you do and finding a good position within your company. All that extra work you put in for that pay rise was worth it in the end and therefore you feel you deserve to spend it on whatever you like.

By all means treat yourself but do something low-key as a one off rather than expensive and continuous. That way, at least it is somewhat contained (and also, you need to treat yourself every now and again, otherwise you'd probably go a bit mad).

The Paradox

But here's the crunch. Yes, you put all that extra work in, your skills have increased and you're worth much more in your field of expertise but how does that benefit you if you spend all of that extra? Especially all that extra on something you have to pay every month for a very long time.

Think about it. Your employer is paying you more as recognition that you have improved both yourself and the company. But you're not recognising yourself. If you go out and spend that extra money in your paypacket every month, then you're not actually giving yourself a pay-rise.

Those extra car payments per month might come from your pay-rise but it's basically wiping that pay-rise out. What you end up with in your pocket is the same - or possibly less - than what you were getting before!

This doesn't make any sense. It means you're more valuable, you're earning more and you're being recognised but the end result is that you come out the same at the end of the month.

That doesn't make sense to me (and yes, I've been guilty of doing this in the past).

How to Stop It

Essentially you need to stop it by not allowing yourself to spend that increased pay-packet. Much like the old phrase PF bloggers like - Spend Less than You Earn - another one can be added to that list:

Don't Increase your Spending at the Same Rate as your Pay

There may be one or two things you want to spend extra on, possibly those things you've been holding out for for years but be careful not to spend every single extra penny you take home. If your expenses increase at a lower rate than your pay-rises, then you'll be doing well.

Of course, if your expenses don't increase at all when your pay increases, then you're doing even better. This is easily done by not altering any of your expenses budget but instead adding that pay-rise straight onto your savings budget.

Lifestyle Deflation

Recently, I have been a victim of a lifestyle change but happily for me, it is in the other direction. I have no idea if there is such as thing as Lifestyle Deflation but I think this is what I have been doing recently.

I recently chose to stop, cut out or cut down a number of my expenses and hence, even though I didn't get a pay-rise at the time, it sure has felt like one. It was a random time to do it but after almost three months I am already feeling the benefit of it.

To finish off, you might also want to consider what areas of your life you can downsize, cut out, do without, sacrifice or even just spend less on. You'll be surprised at how just a few things here and there add up to a fair amount of saving each month.

Oh, and by the way, the first places to look are those things you recognised earlier as contributions to your Lifestyle Inflation. If you didn't have these things before then you can probably still do without them now.

What is on your 'Lifestyle Inflation' list? What can you cut out to help with 'Lifestyle Deflation'?

Sorting Out your Finances in Stages

When was the last time you jumped from your house to work, and then at the end of the day, jumped right back in one massive leap back to your front door.

What? You've never done that before?

Maybe if you work from home you have managed to do that but for the rest of us, work is usually further away than just a large leap. Usually, to get to work we do something like the following: walk, wait, step up, sit down, step down, walk and finally rest when we get in the lift. We do it in stages, one after the other, each building on what went before.

The Journey to Financial Independence is also like that. We do it in stages and each one builds on the one before.

"I'm Not Ready to Switch Over Right Now"

Photo: slopjop

Over the past couple of months, I have had many conversations with many of my friends about finances. I'm not sure why they come and talk to me (ok, I can guess a little) but mostly it works out for both sides in which we each learn something more. Some conversations have been small and to the point, others larger and covering many bases.

I have, however, figured out a slight pattern to what a lot of people are telling me. They say things like "Maybe I don't do it now but I'll do it later" or "I'm not quite there yet but soon, I promise" or "I'm not ready to switch over right now, I have a few things I want to sort out first".

So it seems that people want to change things but don't really want to commit to it yet. It is definitely a recurring theme.

My advice to any and all of you thinking about doing something about your finances, whether it's opening a freedom fund, starting your savings or even planning your retirement:

... JUST START NOW!

Sorry I screamed but take my advice, if you don't start today, you probably won't start tomorrow either and as we all know, tomorrow never comes. You'll wake up one day and say "I wish I started saving 10 years ago".

It turns out that I wish I'd started sorting out my financial future about 5 years ago but I'm just happy that I'm now on the right road. To those younger than I am, just go and re-read your high-school maths books about compound interest and you'll be glad you started when you did (and I wouldn't mind some credit when you're old and rich). If you still don't believe me and you didn't click that previous link, go and do it now since it has already said everything I could have said (and more).

Do It In Stages

Photo: nakae

The other thing you have to remember is that this particular area of your life, your financial matters, are pretty complex. There are strategies to make it simpler but in all honesty no matter how you look at it, it's fairly complex. Because of which, it also means there are a number of different ways you can do things. There are also a number of different things you can do and a number of different things you can consider.

All this adds up to an extremely rich set of paths you can take from here (now) to there (retirement or any other goal of yours).

With all those paths open to you, you can choose which direction you want to go, hopefully choosing one which takes you forward and therefore you can choose exactly what you want to do.

As you would get to work in the morning, you don't just take a big leap at the start of your journey and arrive there, you do it in stages. At first you might start off your emergency fund, you might decide to spend less or you might decide to earn more. You can of course choose everything at the same time but it's much easier to break it down into little steps and just start wherever you feel comfortable.

And that is the key, that you have to start somewhere! Starting earlier rather than later is better so why not choose to start today? Something, anything, whatever you like. Start today and maybe tomorrow, do something more. You surely won't regret it.

Call for you to pledge below to start RIGHT NOW. It doesn't have to be much but just start. Leave a comment and we'll all cheer you on your merry way to financial independence.

What is Passive Income and Why You Need It?

Passive income is the holy grail of personal finance. Passive income gives you more freedom than ever before. Passive income is what you should be striving for.

But what is it and where do you find it?

First thing's first. Let's look at some history.

'Swapping Hours for Money'

Photo: chris_gin

Whether you're in a full-time job, part-time job, temping or contracting you're essentially doing one thing and that one thing is what has been happening for centuries. You're swapping hours worked for money. Yes, call it 'compensation' or something else fancy but essentially you're swapping one for the other and that's it. It's that simple.

Income = Hours worked * Your rate per hour

Of course, what you get in return - your rate - is generally based on your skills and experience. The more skill and the more experience you have, the more you're likely to be paid per hour worked. Hopefully over the years, we get better at what we do and we are rewarded with a pay-rise.

The Problem with this System

Even though the majority of people go through their entire working lives doing this exact thing there is one huge drawback to this system. Consider the fact that the market conditions mean that what you can charge per hour is limited by what someone will pay. Even if you're lucky and you get into the top 10% or even the top 1% of earners the amount you can charge per hour is limited.

Therefore, if you want to increase the left hand side you have to increase the time component. No! I didn't think so either, you already work enough. This essentially means we've got a problem. You can't change your rate (much) and there are only so many hours in the day.

24 to be exact.

And you don't even want to be working a third of those either (if you include the weekends).

Can you see the problem now? Yes, you might get lucky and earn $1,000/hour which would be pretty sweet but in reality that's not going to happen. So what can you do to ensure you can get an increased income?

Change the Equation!

As stated earlier, both of the elements on the right-hand side of the equation are problematic. Your rate is a problem and the amount of time is a problem. What's the lowest common denominator of both of these elements? That's right. You.

Your time and your skills and experience.

The answer therefore is to remove yourself from the equation. This leaves the equation we stated earlier in tatters so we have to look at it through a fresh pair of eyes and change the equation. We're starting from scratch and what we have now is something like this:

Income = ?

So what we really want is something whereby we (most probably) have to do a little work up front but we can reap the rewards for that work for a long time to come. At regular intervals.

Essentially what we're doing here is making sure that this new income - Passive Income - is money given to you but for which you're not a part of it. i.e. you don't even have to lift a finger and if you do, it's only very slight.

How Can I Get My Hands on Passive Income?

There are a number of options. The main ones you'd traditionally see are:

• interest earned from your bank accounts
• rental money from real estate
• stocks and shares which pay dividends
• royalties from music, a book or other published work

Of course, we also live in an electronic world now and one in which there are many more ways to generate passive income. Think about some of these (usually placed onto a site you own):

• selling your photos
• affiliate programs, like AdSense, Amazon
• creating and selling eBooks
• selling user-generated works, like CafePress
• having 3rd party adverts on your site
• selling adverts directly

The list goes on and as you can see, there are some things which look a little complicated. Rest assured though, once you start generating this income without having to do much work towards it, you'll start to see how it can really help.

My Plan

Currently I own a house and am renting it out. This generates passive income for me though I must admit to having to do bits and pieces here and there. Another advantage is that I can also claim tax back on various aspects of owning it but renting it out.

At the moment, the house is definitely something which gives me an advantage, though I will certainly be playing with some of the new electronic ways of generating passive income. At the moment, I have a job so as well as swapping my time, skills and experience for money I can also go to bed safe in the knowledge that whilst I am sleeping, I am still earning money.

What are your Passive Income strategies? Are you looking at starting, or expanding, what you currently get?