Adjusting Spending Habits for Financial Freedom

"As income rises, expenses tend to rise in tandem, unless consciously counter-acted," explains author Thomas J. Stanley in Stop Acting Rich. Left unchecked, lifestyle inflation causes perpetually living paycheck to paycheck despite earning more.

However, methodically adjusting spending habits allows for the growth of the gap between earnings and expenses to build wealth faster. The earlier these financial foundations get established, the better.

This month's column explores realistic techniques for recognizing and curbing lifestyle creep, enabling increased saving rates and ideally achieving financial freedom sooner. Quotes originate from actual millionaires and finance experts who successfully avoided excessive consumption.

Recognizing Lifestyle Inflation

Lifestyle inflation describes discretionary spending increasing alongside income rather than intentionally saving or investing the surplus. Common examples include:

• Constantly upgrading to newer, more expensive housing
• Buying additional cars or recreational vehicles
• Enrolling kids in ever pricier extracurricular activities
• Taking frequent, lavish vacations in peak seasons
• Expanding wardrobes with designer clothing and accessories
• Furnishing homes with high-end decor and appliances

While occasionally splurging on luxuries is fine, regularly living at the edge of each pay raise gets financially risky fast. Job losses hurt more, and retirement timelines extend from lack of savings.

"The key is living well below your means early in your career, avoiding the temptation to show off wealth," advises financial advisor Wes Moss. When income rises by 10%, try increasing your lifestyle by only 5% while investing the rest.

Examining Spending Motivations  

Tactically adjusting habits first requires introspection into underlying emotional triggers behind consumption. Are purchases made to:

• Impress others and gain external validation?
• Fill an internal void or achieve short-term happiness?
• Satisfy boredom or cope with stress?
• Keep up with friends' or colleagues' spending?

"Many buy things they don't need, with money they don't have, to impress people they don't even like," laments financial coach Alok Deshpande. He advocates defining personal values to spend accordingly instead.

Author Shannon Hayes agrees in Radical Homemakers, "Separate self-worth from material possessions and others' judgments. True fulfillment comes from purposeful living." Regularly reflecting on purchase motivations helps limit emotional spending.

Tracking Income vs Expenses

Quantifying the gap between earnings and expenditures is critical for exposing problematic trends early. Start by recording total income from all sources, salaries, bonuses, investments, and side hustles. Then, tally monthly expenses across core categories:

• Housing (rent/mortgage, property taxes, HOA fees, maintenance)
• Transportation (car payments, gas, insurance, repairs)
• Food (groceries, dining out, food deliveries)
• Utilities (electricity, water, gas, phone, internet)
• Insurance (health, dental, life, disability)
• Personal (clothing, haircuts, gym, entertainment)
• Debt payments (student loans, credit cards, personal loans)
• Subscriptions (streaming services, apps, box deliveries)

Compare percentage of income allocated to each bucket. General guidelines suggest:

• 50% on needs (housing, food, healthcare, utilities, minimum debt payments)
• 30% on wants (shopping, travel, entertainment, gifts)
• 20% on savings and investments

"Aim to save at least 15-25% of gross income. But those with high incomes still spending over 90% are the most at-risk," warns author Grant Sabatier. Firing up a spreadsheet or using apps like YNAB and Mint streamlines number crunching.

Automating Savings Contributions  

Curbing lifestyle inflation ultimately means prioritizing saving and investing before spending the rest. The simplest way to guarantee this is to automate transfers to designated accounts on paydays.

"I automatically route raises into investment and savings accounts, as if I never earned it at all. This ensures money gets deployed productively," shares Chris Reining, who achieved financial independence by age 35.

Consider establishing automatic monthly contributions into:

• Employer-sponsored retirement plans (401k/403b)
• Health Savings Accounts (HSA) if available
• Traditional or Roth IRAs
• Taxable brokerage accounts
• High-yield savings account for emergencies
• 529 college savings plans
• Mortgage or loan repayment

By paying yourself first through automation, the remaining income naturally limits discretionary spending to essentials.

Increasing Savings Rate by 1% Annually  

For those currently saving under 15% and struggling to make dramatic changes, consider boosting savings by just 1% more each year until reaching 20-30% of earnings.

Certified financial planner Matt Becker explains, "Small, gradual increases are more sustainable than drastic overhauls. Save an extra $50-100 per month and celebrate the win."

This could look like: Year 1: 10% savings rate Year 2: 11% Year 3: 12% 
Year 4: 13% And so on, until surpassing 20% comfortably. Such incremental progress still achieves impressive results over 10-20-year periods thanks to compounding returns.

Habit Substitution Techniques  

Rather than eliminating pleasurable spending categories entirely, investigate lower-cost alternatives to maintain novelty without sacrificing fun. Some ideas:

• Cooking restaurant-quality meals at home for a fraction of dining-out prices
• Hosting potluck game nights instead of meeting friends at bars
• Attending free museum days or public concerts over costly ticketed events
• Traveling during shoulder seasons when airfare and lodging are cheaper
• Joining a buy-nothing group to source cheaper household goods
• Waiting for major sales to do intentional shopping

"Spending lavishly is no more sophisticated than spending prudently," argues author Elizabeth Willard Thames in Meet The Frugalwoods. She maintains fulfillment through hikes, library books, and DIY projects.

House Hacking and Geoarbitrage  

Housing usually makes up 30-50% of household spending. Reducing this category frees up substantial cash to invest for passive income.

One method is house hacking - strategies to cut housing costs by earning rental income from your primary residence. "I lived in one bedroom and rented out the others, cutting my housing bill in half," details real estate investor Chad Carson.

Other ideas:

• Purchasing a small multi-family property and living in one unit
• Renting out garage, basement, or backyard cottage on Airbnb
• Taking on a roommate or renting to long-term tenants

Another option is geoarbitrage, moving from expensive cities to lower cost-of-living areas, especially viable for remote workers, maintaining a similar salary while slashing housing and lifestyle expenses compounds quickly.

Banker Kristy Shen and her husband implemented geoarbitrage by moving from Toronto to a small town and investing the savings. They retired in their early 30s with a $1 million portfolio.

Delaying Major Purchases

When feeling tempted to upgrade cars, electronics, or appliances, practice the 30-day rule. Write down the desired item and cost, but wait 30 days before purchasing. After one month, reassess if you still highly value the item or if the urge has passed.

"The longer I waited, the less I wanted most things. Giving time for the excitement to wane helped distinguish fleeting interests from worthwhile buys," shares reformed shopaholic Cait Flanders.

For essential big-ticket items like replacing broken fridges, buy quality, mid-range models that retain 70-80% functionality of luxury brands at 50% less cost—research using Consumer Reports for reliability.

Maintenance and Repair Mindset  

Extending the lifespan of existing possessions through regular maintenance saves substantial money by reducing replacement frequency. Some proactive habits:

• Changing oil and filters in vehicles every 5,000 miles
• Cleaning HVAC system and replacing air filters seasonally
• Promptly repairing small appliance malfunctions before worsening
• Laundering clothes per manufacturer instructions and line-drying
• Conditioning leather shoes and jackets with waterproofing polish
• Defrosting freezer and deep-cleaning dishwasher annually

"Our grandparents lived through the Great Depression and knew how to maintain things. We live in a disposable culture, but buying fewer, higher-quality items is satisfying," reflect The Minimalists Joshua Fields Millburn and Ryan Nicodemus.

When items do break beyond repair, consider searching second-hand shops, Craigslist, or Facebook marketplace before automatically buying new. Gently used goods cost a fraction of retail.

Budgeting for Conscious Splurges  

Occasionally, indulging in small luxuries provides a motivating release valve to any financial plan. The key is budgeting for conscious splurging that is aligned with personal values.

"On a backpacking trip 20 years ago, I spent half my food budget on a single piece of chocolate cake. I still remember this spontaneous splurge fondly," recounts author Vicki Robin. She suggests spending lavishly on a few meaningful things.

Calculate "happy money" as 5-10% of take-home pay set aside in a dedicated savings account for pampering. Having a fun money allowance to enjoy relieves deprivation anxiety.

Financial coach Sarah Von Bargen sums up, "I ruthlessly cut spending on things I don't care about, so there's always money for what I love, like travel. Spend on your priorities and own it."

The Long Game of Building Wealth  

Ultimately, financial freedom results from decades of consistent saving and investing more than you spend. Resisting lifestyle inflation is the core habit enabling wealth accumulation on any income.

"The path to riches lies in spending less than you make, and doing it for a long time," emphasizes author Morgan Housel. Time in the market beats timing the market when investing.

Adjusting mindsets and habits takes effort, but the compound effect of small changes cannot be underestimated. Those who systematically live below their means eventually win the long game.

What spending patterns could you optimize to increase your savings rate this year? Which splurges do you most savor? Aligning money and attention to your unique values cultivates a wealthy life.

Here's to enjoying financial wins on your journey to freedom!