Almost exactly two years ago, I had just accepted a new job in a different city. I decided to take two weeks off in between jobs, so that I could mentally prepare for the impending move and the challenges of starting over with a new-to-me company.
One day during my time off, I dedicated a few hours to some serious number crunching. I wanted to figure out how much additional money I’d be bringing home each month at the new job. I used this knowledge to create a detailed breakdown of how I wanted those additional dollars to be allocated, ensuring that I wouldn’t allow my newly increased spending power to run amok.
The takeaways from this exercise significantly boosted my awareness of how I could optimize my situation to build the life I wanted.
Today, I’m going to share the perspective I gained during this job transition two years ago. Even though my long-term goals have adjusted since that time, the motivation behind my decisions has remained the same: to make use of the resources available to me to build the best life possible.
Find Your Number
How much do you actually need to live comfortably for a given period of time? This is your number.
When I changed jobs two years ago, I wasn’t acutely aware of how much I needed to sustain my current lifestyle. I just knew that I had been making enough to live comfortably. I used that number as a baseline and instantly chopped the difference of my new salary off the top. Any extra money would be saved by default. This was a no-brainer!
Over the ensuing months, I refined my number even further. I gradually became aware of what I could cut out, and with each step I came closer to my true number.
I realized I didn’t like spending significant hours watching mediocre television programming, so I got rid of cable. This instantly opened up hours of availability to pursue other interests. I realized I loved running outside and hated the treadmill, so I got rid of an expensive gym membership that was barely used. I realized my lifestyle was set up so that I didn’t need a car, so when it was sideswiped in a hit-and-run while parked outside my apartment, I sold it rather than pay an insurance deductible to have it repaired. No more insurance or fuel costs.
Decisions like this became easier over time, as each one strengthened my ability to discredit the poor justifications for paying to make certain things part of my life. By identifying and removing things that did not provide adequate value, I was saving more money and at the same time moving closer to the lifestyle that I truly wanted.
This was a huge win. I was becoming more and more aware of my number. To find your number, start by evaluating your own needs and nice-to-haves.
Reign In Your Spending Power
If you are used to loosely adjusting spending based on earnings, it is difficult to know how much you truly need to sustain a comfortable lifestyle.
A common term for increasing spending with income is lifestyle inflation. Lifestyle inflation is what happens when a higher salary leads to a larger home, a nicer car, and increasingly expensive taste.
It is difficult to suppress lifestyle inflation, as it is a natural instinct. As humans, we are hard-wired to perpetually seek a better life for ourselves and our loved ones. Typically, quality of life is measured as a direct corollary to spending power. The more money you earn, the more you can spend. The more you can spend, the more nice things you can possess.
As a byproduct, lifestyle inflation instills the mentality that quality of life is directly linked to material possessions. This leads to a decrease in awareness of what you actually need to live a comfortable life. The more you have, the more you think you need to get by.
The key to combating lifestyle inflation is to reframe your mentality around spending power. If spending power is given free reign, the controlled costs in your life become elastic. If the cost of life is elastic, it’s impossible to maintain a baseline of what you need to live comfortably.
The cost of living comfortably must remain reasonably static in order to plan a stable future.
Focus on the Right Side of the Equation
It’s easy to strictly focus on earnings as a baseline for what you need to live comfortably, and this is a common mistake. This is precisely why I didn’t have a full grasp on my true cost of living before making an intentional effort to figure it out. This is also why many retirement calculators use current income as an assumption for what you will need in retirement.
Focusing attention on the earning side of the equation leaves many key questions unanswered. Focusing instead on the spending side of the equation will provide answers to those questions.
How can you build an emergency fund containing six months of living expenses if you don’t fully understand what your living expenses really are?
How can you plan to take a hiatus from work to pursue a personal interest if you have no idea how long you can survive without a paycheck?
How can you plan for retirement if you don’t understand how much you really need saved?
When I changed jobs a few years ago, I received a substantial pay increase. This is a pretty typical scenario and usually a primary motivating factor when switching jobs. However, the path I took at this crossroads has drastically changed the trajectory of my life. Rather than blindly tapping into my newly increased spending power, I chose to make a concentrated effort not to increase the cost of my life.
Instead, I embraced the opportunity to re-evaluate my spending decisions, cutting out what I didn’t actually want. This gave me a holistic view of my lifestyle, and the net result was a decrease in my cost of living. I used this knowledge to create a supercharged savings plan that will enable me to take smart risks in the future, and to live a life not directly bound to the constraints of my financial situation. This has lead to an increase in my happiness.
Because I got rid of cable, I spend less time watching TV. This allows me to concentrate more on my passions, such as writing. Because I got rid of my car and made a conscious decision to live close to work, I spend less time sitting motionless in a driver’s seat. This allows me to spend more time outdoors, walking and biking around the city. I was able to identify and remove adverse structures from my life to live more aligned with my values.
These changes have worked wonders for both my physical and mental health, with the added benefit of a lower lifestyle cost.
Knowing what you need to survive for weeks, months, and years makes it much easier to make decisions with clarity and awareness. Five years ago, I had no idea how much I would truly need to survive comfortably for a year without pay, let alone fund a retirement. Building my life around that knowledge has granted me a level of freedom that I was previously far removed from.
Regardless of the trajectory of your life, making similar concentrated efforts can help immensely. You may want to change careers, you may want to travel, you may want to start a family, you may want to start your own business. All of these things entail legitimate and substantial financial considerations. The more you empower yourself to reduce the weight of those considerations, the more free you are to make decisions based on your true values and desires in life.
Are you using your spending power to build a better life?