TACKLING LIFESTYLE INFLATION: HOW TO KEEP YOUR WEALTH GAME STRONG

Welcome to the pre-game huddle. Picture this: an athlete at the peak of their career, millions in the bank, but then, fast forward a few years, and they're struggling financially. Unfortunately, this isn’t just a cautionary tale; it’s a scenario that’s all too common among those who don't play the long game with their finances. 

Why does this not only happen to professional athletes but to countless others as well?  In my experience, people often measure the world around us by what we can see. If our family is smiling and laughing, we assume they’re happy. If we see a team up on the scoreboard, we assume they’re going to win. If we see someone driving an expensive car or wearing an expensive watch, we assume they’re successful.  I see this mindset every day, and frankly, it’s sickening.

The more money people bring in, the quicker they look to spend it. A raise leads to new clothes, a bonus leads to a bigger TV or a nicer car. People are obsessed with the idea of looking wealthy and successful, rather than being wealthy and successful. Simply scroll through social media and you’ll see countless people “living the life.” Lavish hotels, exotic destinations, and decadent meals, all captured in a photo or short video.

The question is, are we seeing the whole picture?

I am by no means saying you shouldn’t look to live a nice lifestyle. We are, however, moving into bonus season, when many hardworking Americans will receive larger sums than usual from their employers. While it can be tempting to use this for a nice vacation or buy that expensive gadget that you’ve had your eyes on, I urge you not to. The choice here isn’t simply to spend, but rather whether you wish to be rich for the day or wealthy for a lifetime.

 You see the same thing in sports. Any team can pull off a miracle upset win on “any given Sunday” or throw an unnecessary amount of money on a single marquee player that will make no difference to their overall results (please see the New York Mets and San Diego Padres). It’s the truly successful franchises (those that build dynasties) that have specific offensive and defensive strategies to maintain their place at the top. The same mindset needs to be applied to your wealth for it to be sustainable. 

In this playbook, we'll break down lifestyle inflation and craft a game plan to tackle it head-on, helping to ensure your financial goals seek to build a legendary dynasty.

The Lineup: Understanding Lifestyle Inflation

Before we can tackle lifestyle inflation, we need to understand it. Lifestyle inflation occurs when an individual's spending increases as their income goes up. It's a gradual shift, often going unnoticed until the budget is stretched thin, and savings are stagnating despite a higher income. In other words, spending increases in line with the rise in income. It’s perfectly understandable, people have more cash, and they want nicer things.

The difference between the everyday earner and ‘executive athletes’ is that the latter have a financial discipline that they’ve built and maintained from their early years of working. This means living below their means and putting their money to work, and not just working for it day in and day out.

The best example of this is in quality businesses.  Business success isn’t measured by how much revenue a company has but by its profits!  Or, the difference between revenue and expenses.  A good example of this is Apple.  As most know, Steve Jobs was fired by Apple in 1985, and then brought back to run the company in 1996.  As you can see by the below chart, while Apple’s revenue increased from 1985 to 1996 by almost 5X, their expenses kept up, and their stock price went nowhere.

Post 1997, we see profits start to grow, and so too does the stock price!

Pre-Game Analysis: Recognizing the Signs

The first step to combating lifestyle inflation is to recognize its signs. Are you spending more on luxuries than before? For example, have you started to eat out or order more than you used to? Have your “needs” grown significantly without real enhancement to your quality of life? Has your living space or car got larger without making any difference to your everyday?

Finally, and most importantly, are savings and investments taking a backseat to make room for immediate gratification?

You need to be honest with these questions. Failing to do so will leave a gaping hole in your defense, exposing your financial future to greater risk.

Crafting Your Defense: Budgeting and Savings

Defensive strategy in football is about stopping the opponent from advancing, and the same goes for your finances. The foundation of a good defense against lifestyle inflation is a solid budget coupled with a strong savings plan. Your budget is your game plan – it dictates how you'll allocate your financial resources to win the game. And just like any good defense, it should be flexible, able to adjust to the opponent's (or life's) unexpected moves.

However, this plan will only be as effective as the action taken to stick to it. Consistent and disciplined effort is the foundation of wealth (and an unbreakable defensive line).

Building Your Offense: Smart Spending

A good offense is proactive and strategic. When you do spend, spend on what matters and will advance your financial goals. When looking at the value of a purchase, consider the following:

 In an attacking play, the best option is often to pass the ball - or in this case, pass on a purchase that doesn’t align with your long-term vision. Remember, the goal of any offense is to progress toward and eventually arrive in the end zone. Your purchasing, investing, and saving will determine whether you make it there and how long it will take.

Training and Discipline: Avoiding Temptation

Athletes train relentlessly, honing their bodies and their minds to resist the pressure and temptation on the field. Similarly, building resistance to lifestyle inflation requires discipline. It's about saying no to immediate temptations in favor of your long-term financial health. In other words, it’s about saying no to a good today in service of a greater tomorrow. 

The best way to foster these good habits is to create systems that make saving automatic and spending thoughtful – because in the heat of the moment, we fall back on our baseline habits. If these habits are positive, you’ll be able to continue progress toward your goals.

The Financial Playbook: Investment Strategies

Investment is how you score points in finance. Instead of letting extra income sit idle or spending it on depreciating assets, the trick is to redirect it towards assets that should appreciate over time. Just as a diversified sports team has a better chance of winning, a diversified investment portfolio can help you reach your financial goals. This might mean maxing out retirement accounts, investing in quality publicly traded businesses, or even starting a side business – whatever plays to your strengths and fits your financial game plan.

Invest like a team owner, not a fledgling player – diversified and strategic, aiming for long-term growth.

The Timeout: Regular Financial Reviews

In sports, timeouts are used to stop the clock, reassess the situation, and alter strategies. In managing lifestyle inflation, this translates to regular financial reviews. Assess your income, expenses, savings, and investments to ensure you're on track. Are you moving towards your financial goals, or has lifestyle inflation started to creep in?

If the latter is the case, adjust your plan as needed – the goal is to stay agile and responsive. Furthermore, progress isn’t a sign to take your foot off the gas. Winning teams capitalize on momentum and use it to further their lead. When you’re making progress on your financial goals, this is the best time to reinforce your commitment and maximize your returns. The only thing better than achieving your goal is doing so faster than planned.

Regular financial reviews are like huddles. They’re essential to make sure every player on your financial team knows the play and is working towards the same goal.

Coaching and Mentorship: Seeking Financial Advice

The Patriots had Bill Belichick. Green Bay had Vince Lombardi. Behind every great team is a group of highly knowledgeable and experienced coaches, who put everything in place for a team to succeed. They mentor the players, iron out weaknesses, and build on strengths, all with the goal of keeping their team on the path to success. It’s okay not to be an expert on something. What isn’t okay is failing to get the help that you need. Even Tom Brady couldn’t win a Super Bowl without blockers and receivers.

Seeking advice from financial advisors and mentors can provide winning strategies and insight into the habits and measures that you can use to achieve your own financial goals. More importantly, they can help to keep lifestyle inflation at bay and help you grow sustainable wealth that you and your family can enjoy for years to come.  They typically help you tap quadrants 3 & 4 in your 4 quadrants on knowledge, which I discussed on my latest podcast, The Big Bo $how.

Playing for the Long Haul: Keeping Your Eye on the Prize

Tackling lifestyle inflation is one of the keys to achieving true financial freedom. Life is a marathon, not a sprint, which means keeping your eye on the long-term prize. In other words, it’s about winning a championship, not just a single game.

Remember, the goal isn't to deprive yourself but to ensure that your spending aligns with your values and your long-term objectives. By managing lifestyle inflation, you're not just maintaining discipline; you're committing to a financial future that is as robust and rewarding as the career you're building.

With the right habits, discipline, and people in your corner, you can achieve your financial goals and avoid the trappings of the fleetingly rich. You can play for more than a season, you can play for a lasting dynasty. To start building your dynasty, get in touch with us today!

Disclosures:

This piece contains general information that is not suitable for everyone and was prepared for informational purposes only. Nothing contained herein should be construed as a solicitation to buy or sell any security or as an offer to provide investment advice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. Past performance does not guarantee any future results. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. For additional information about Julius Wealth Advisors, including its services and fees, contact us or visit adviserinfo.sec.gov.