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Your boss calls you into his office and tells you that you have been promoted. You’ll be getting an impressive title, a corner office, and of course, a big fat pay raise. Upon hearing this news, you go back to your desk and start making plans to buy that sports car you have always dreamed of owning but couldn’t afford until now.
That is lifestyle inflation.
Put in the simplest possible terms, lifestyle inflation refers to the phenomenon of your cost of living increasing alongside your income. As more money goes in, more money goes out.
It seems harmless, and after all, why shouldn’t you enjoy some of the finer things in life when you get a raise? It’s very easy to tell ourselves that we have worked hard and deserve to own fancier, more expensive stuff.
The truth is that lifestyle inflation is one of the great destroyers of wealth and is what will prevent many people from achieving financial freedom.
To understand why refer back to the financial freedom equation:
Financial Freedom= (Income from work you love + Passive income) > Your living expenses
If your living expenses keep increasing, financial freedom gets further away.