If you’ve been keeping up with the online money blogging world, you’ve probably heard about the 4% Rule, or 3% (3.5%) rule for some. However flawed, it gives you a decent start on estimating how much to build up your nest egg before you start telling your managers at work how you really think about their Maserati while you’re stuck with a fifteen year-old Honda Civic. Once you figure out how much you spend annually, you can estimate how long your money will last.
For instance if you spend roughly $50,000 in today’s dollars annually, you’d need $50,000/0.04 = $1.25 million in today’s dollars to last at least 25 years. This has to be invested in some manner too to stave off inflation, and gold bars under the mattress doesn’t count. Fair enough, but what happens after 25 years? We don’t have much data in the ill-referenced Trinity Study to extend beyond that, so some just adjust the percentage withdrawal rate more conservatively. With a 3% withdrawal rate at $50,000 annual expenditure, you’d need $1.67 million invested.
“Lifestyle creep’s a bitch” -says somebody. I will claim it as my own if no one else does.
Living your entire twenties holed up studying and drowning in debt while your friends in banking enjoy their youth is the prime way to fuel your desire for lifestyle creep. That’s what doctors go through. Sprinkle in a few of your classmates who overextend their future self or have family money, and you’ve got a good (false) sense of how doctors should live.
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Financial discipline can be an acquired skill, but like many behaviors in life it is highly influenced by our childhood. Not everyone can be like Mr. Money Mustache who grew up in an average Canadian household with “normal” expenses and discover that there is an alternative financial blueprint to life. The majority of people I know who are financially conscientious have had some foundation in their younger days. It could be as simple as mowing the lawn for an allowance or just seeing someone in the family struggle financially. There has to be an exchange of work for money. The ultra-savers at a young age typically are a subset of this group who use these fundamental principles and kick into overdrive. The rest of us without the head start of financial intelligence simply learn it the hard way—through experience and time. We get into credit card debt or some financial ruin that triggers our brain to fix the problem.
Doctors, on the other hand, might have never witnessed financial responsibility in their childhood or gotten themselves into financial ruin. Many doctors that I’ve known come from middle class families who had food on the table every night and family vacations every year. By the time they start earning some money in residency, they will have acquired substantial borrowing ability from banks or predatory lenders. We are prime victims for lifestyle creep.
I’ll be first to admit that I’m guilty of lifestyle creep. After all, why shouldn’t we own at least one nice pair of Louboutin’s if we’re curing cancer every day? That is exactly how lifestyle creep catches you. When I was a resident, I earned around $40,000 a year and spent 60% of my earnings living in a HCOL area. There wasn’t much left to repay my loans and live lavishly. There was a lot of pent-up consumerism in me. Once I got a real job I was tempted to live in a larger place, buy a nicer car, and upgrade my wardrobe. The problem with increasing your living expenses proportionally with your income is that you never make any headway towards your financial goals.
Over the years, I’ve been slowly tracking my lifestyle creep. The brunt of the lifestyle creep comes from our mortgage, which in a way is a necessary evil. If you are obligated in your profession to stick around and work a certain number of years before you make any career changing decisions, it might be worthwhile to own a piece of America in the meantime. The other contributions to lifestyle creep end up being discretionary.
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Between the end of fellowship to my first year of practice, I increased my living expenses by around $15,000 a year. This rate slowly crept up until it skyrocketed another $40,000 with mortgage expenses. Purchases like an overpriced refrigerator do not necessarily increase quality of life, but do dig into your savings rate. At some point, our earnings actually plateau and any lifestyle creep will start eating away at your magic number. If we hope to have any possibility of reaching our savings goals, we have to constantly reassess our expenses. If we can’t adjust down, then we’d better find a way to increase our earning potential
How often do you assess for lifestyle creep?