We all want to be financially independent.
But for many reasons, it just doesn’t happen.
The main reason, the chief problem, is that life is expensive. Simply put, there’s just very little cash left over once our living expenses are paid.
We come across this all the time. The news and current affairs programs remind us of the skyrocketing prices for this and that.
Even our Reserve Bank (the RBA) tracks how the price of goods and services increases, year after year.
And this is good! We need to track such things. Also, it’s important for us to be aware of how much living costs are increasing.
But what if we’re looking at it the wrong way? What if we’re measuring the wrong things, or we’re missing the bigger picture?
Instinctively, most of us know how inflation works – even if we don’t think about it.
For example, a loaf of bread 40 years ago cost around 25 cents, versus $2 or so today.
We’re used to seeing this happen over time. Indeed, we’ve grown to expect it. And not just with bread, with damn near everything.
But what about the stuff that falls in price?
Or more commonly, what about when stuff increases in price, but at a slower rate than our incomes grow?
When this happens, it essentially means we can buy more products and services, for the same portion of our income as before.
Put another way, we have more money left over after purchasing the same things – our purchasing power has increased.
Let’s say the cost of living, also known as CPI (Consumer Price Index) as measured by the RBA, is going up at a rate of 2% per year.
Now, let’s say household incomes are also increasing, but at a rate of 3% per year.
So things got more expensive, sure. But our earnings went up slightly faster – meaning our purchasing power has increased. We actually have more disposable income than before.
In this scenario, our standard of living has increased – to use the proper term.
When this occurs, it gives us more money to spend, save or whatever we please. And to be clear, this is precisely what’s been happening over the past 100 years.
As we’ve become more productive and efficient over time, using the power of technology, it means we can now produce things much faster, with far less cost.
Side note – this is basically why the sharemarket goes up over the long term. The wealth-building power of human endeavour and technology, increasing productivity.
Also, international trade has meant we can import things that were made in low-wage countries, increasing our purchasing power – our wage stretches even further.
Again, most of us realise this has occurred over time, whether we think about it or not.
So how does our cost of living compare historically? And how much have our wages gone up in comparison?
Since most of the Western developed countries have similar living standards, we can cheat a little and look at this US study.
The study shows history of consumer spending for American households from 1900-2003. We can be fairly certain that roughly the same factors have played out here in Australia.
In 1900, many citizens were farmers and lived on the farm they worked at. They spent roughly 80% of their income on food, clothing and very basic housing costs. Only a fraction had gas or electricity, not to mention flushing toilets.
The category for ‘other’ spending was roughly 13% of their wage. My best guess is, that’s what was leftover for discretionary spending.
Yes, it’s hard to relate. These folks didn’t live like us. They weren’t trying to buy an affluent-suburban apartment. Food costs didn’t include ‘super-food’ snack bars, lattes or smashed avo.
This is what it cost them to survive, with some small level of comfort.
Regular workers didn’t have cars. Nobody had a smartphone. Hell, no-one even had a TV!
With growing technology, the use of better machinery helped make many industries more productive and efficient. And becoming more productive lead to wage increases.
Because of this, the cost of food was covered by a smaller chunk (30%) of wages, compared to before (40%).
Interestingly, the ‘other’ spending category grew to 21% – in line with the increasing prosperity and living standards of the workers.
The study concludes, with food and clothing costs now only chewing up 17% of incomes, compared to 57% in 1900!
We’re spending much more now on housing and transport than decades prior.
And notably, the ‘other’ category now makes up 39% of spending. I find that very interesting.
Is it any coincidence we now drive around in super-sleek SUVs, and live in homes with 210% more space per person than 100 years ago.
Not to be outdone, Australians have even bigger houses than the yanks – the biggest in the world in fact! Dwelling size has more than doubled over the past 60 years, despite less people living in them – household sizes have been shrinking for the last 100 years!
Safe to say, we’re living a lot larger and fancier, than our ancestors were.
Now, let’s look at an Aussie example. Instead of going back 100 years, we’ll just go back 50 years. Hopefully that makes it more relatable. And that’s all the data I could find anyway!
In 1966, the average Aussie wage (according to the ABS) was around $60 per week.
And in 2016, the average* Aussie wage had grown to $1,533 per week.
Sounds good. But what about inflation?
Using this RBA Inflation Calculator, we can determine that inflation over that 50 year period averaged 5.2%. This means the cost of living grew roughly by this much on average, each year, over that time.
By using a compound annual growth calculator, we can measure the growth in incomes over that time. Turns out that the average wage grew 6.7% per annum over the last 50 years, a fair bit quicker than the cost of living.
Or another way, the average weekly wage in 1966 is the equivalent of $758 today, if wages just grew with inflation.
Effectively, real wages and our purchasing power is double what it was 50 years ago!
Yay, instant 50% savings rates for everybody right!? Hmm, not quite.
This is what they call an increasing standard of living. We have twice as much income now, even after adjusting for inflation. So why aren’t we rich?
Yes, things cost a lot more now. But remember, our wages have grown even faster!
So it begs the question – where’s the money? Where the hell has it gone?
If you’ve had a think about it, you’ll realise we all live much differently to decades past.
Consumerism took off (we bought more shit). We live in bigger, fancier homes. We drive luxurious, computerised cars. Almost everyone can afford international travel.
We have $50k celebrity-like weddings. We have ridiculously futuristic mobile phones, with the equivalent of $900k worth of features. We’re addicted to take-away coffee, outsourcing much of our cooking and the national sport is online shopping.
In short, our lifestyles got a whole lot frickin’ fancier!
It’s pretty clear we’re not just surviving with some comfort anymore.
In fact, the comfort level has been pumped full of steroids, filled with hot air and shot out of a cannon, heading for the moon!
So we find ourselves living this modern life, that nobody could even imagine 50 years ago.
This is lifestyle inflation at it’s core. And unfortunately, we tend to have very short memories. We don’t even realise it’s happening. Well, maybe some of us do.
Also, let’s be clear, I’m not hating on anyone for enjoying the good life. I enjoy it too. But I see it a little differently.
All this data is actually telling us something wonderful. Basically, once we cover all our basic living costs (surviving in comfort) we should have a mountain of cash left over!
The inconvenient truth is, most of what we’re spending our money on…is completely optional!
If that wasn’t true, it would be impossible for anyone to retire young. Let alone to do it by the age of 30 or so, like myself and others.
But it’s not all unicorns and puppies. This massive increase in our standard of living comes at a cost.
First of all, we have so many choices available to us, that it’s actually too much choice.
Paradoxically, the more options we have to choose from, the more anxious we become. And high anxiety is rampant in modern life. We’re less satisfied, and more depressed than ever.
We’re more likely to regret our decisions. Also, it makes our expectations much higher. Because with all that choice, surely there’s a perfect car, job or lunch option?
Well, there’s not. But unfortunately, we’ve grown to expect incredible outcomes.
Check out this video to see what I mean – The paradox of choice.
I’ve experienced this on multiple occasions. Often, I’ll procrastinate over something small like which colour shirt to buy or what to have for lunch, until eventually I’m so tired of thinking about it, that I don’t want anything!
It’s not an important choice. But with all the options available, it just becomes paralysing and exhausting.
So it’s been found, people tend to be happier with a few choices, but not too many!
So we’ve discovered our basic living costs are much, much cheaper than they used to be. And we have a monstrous amount of disposable** income that we never used to have!
Unfortunately, the supposed high cost of living doesn’t exist.
In fact, it’s simply the cost of high living. That is, maintaining a certain elevated lifestyle.
Nobody wants to admit that. But it’s true. We just have a very short memory and such little appreciation for how people used to live. And we rarely talk about how much our lifestyles have changed over time.
We prefer to deny it. To find excuses and holes in the data. Because if we admit it, then we become solely responsible for our own situation.
It’s much easier to blame our money problems, mountain of bills and a lack of freedom on our stingy boss, the government or greedy corporations.
If it’s someone else’s fault, then we don’t have to do anything. We don’t have to change our poor financial habits or behaviours. Instead, we get to continue our affluent lifestyle, with a ‘poor-bugger-me’ victim mentality.
The common mantra that is peddled by the media goes something like this: “It’s so hard to save. Aussie’s are doing it tough. Life is expensive. And the cost of living is going through the roof”.
They peddle this message for one reason. Because it’s exactly what people want to hear. They want to hear it’s hard. It massages their victim mentality juices.
But unfortunately for them, the data shows this is flat out wrong.
Yes, power prices might be much higher one year. Yes, petrol might be through the roof the next year. But we never hear about the stuff that’s getting cheaper, do we?
The bottom line is: on average, and over time, our wages have far outstripped our basic living costs. We’ve just decided (subconsciously) that our standard of living needs to stay on some permanently-upward escalator.
Hopefully, you’ll see that by succumbing to this thinking, we’re just lying to ourselves.
Becoming financially independent is about taking full responsibility. It’s about owning your decisions and taking massive action. It’s doing whatever is necessary to create the freedom and space we want, to work and live as we please.
It means no excuses. And designing our happy, low-cost lifestyles one piece at a time. Not just passively rolling with the herd and accepting the victim mantra.
Every single day, with every choice we make, we’re creating our own future freedom. Or not.
If anything, this should be empowering!
Never at any time in history have we had this much income. Never have our basic needs cost so little.
100 years ago, people had little choice to save for financial independence. They needed the vast majority of their income to stay alive. Now, we need just a portion of our wage for the same thing.
The rest is up to you.
We’re not owed or entitled to a certain elevated standard of living. We’re very fortunate to be living at this time in history, and in a rich Western country like Australia.
You can choose to seize the opportunity for financial independence that only a small piece of the world gets. Or, choose to join the mindless world of consumption-driven excess, and the self-imposed job slavery that comes with it.
It doesn’t matter that much what we choose. As long as we recognise that we are choosing.
Here’s where it gets fun.
Now, it’s your chance to give inflation the finger! And in doing so, reap the substantial savings that gives you the ability to invest for financial freedom.
There’s three chances you get to beat inflation and come out ahead. And they’re all very doable.
As we climb the ladder, increase our skills or progress in our job – our level of salary usually increases with it. So in this scenario, our salary will get a nice bump every few years or so.
Of course we’ll be investing that extra cash for our future, instead of upping our spending.
This is the most common pay-rise we’re used to. As we become more efficient over time as a species, producing more with less time/cost, we will likely receive wages that grow slightly faster than the cost of living.
Just like what’s occurred for the last 100 years. But unlike the population up to this point, you’ll be saving that extra bit each year won’t you?
As I said earlier, the RBA tracks the change in price for a given basket of goods and services.
According to their own paper, the CPI inflation measure usually overstates actual inflation experienced by households. Because it’s a fixed basket, as prices change they assume our behaviour stays the same. But when we optimise our spending as prices change, we actually experience much lower inflation than is assumed.
Also, the basket is adjusted every few years or so, to become more relevant. As there’s widespread adoption of newer products, services and generally fancier stuff, it becomes included in the prices they track.
Clearly, once we realise how damn good we’re living already, it’s not hard to imagine our lives being fine the way they are into the future. We don’t need to constantly upgrade our lifestyle to enjoy life!
During our journey, we practised these 3 ways to beat inflation and continually increase our savings rate. And by regularly assessing our cost of living, we’ve managed to avoid inflation overall, for the last 10 years.
Since you’re reading this, you’re probably aiming to retire early. But what you’re really trying to do, is beat the system. Think of it like a game.
Learn the rules and strategies, play the game smart and you could be financially independent in 10 years or less!
Look, I’m not saying you have to sit in a dark room and eat a bowl of rice each day. But just recognise that for every handbag, $14 pub beer, holiday and car payment…there’s a cost.
You’re not just spending your money, you’re spending your freedom.
Seems to me, that we have much to gain by looking back and putting the current excess in the context of history, and the world. And from there, we can still enjoy our rich modern lives as long as we just tone that shit down a bit!
For the more hardcore folks, one way to approach it is to start from scratch. Yes, design your life from zero. Scale it up one worthwhile thing at a time, with a focus on what truly makes a human happy. You’ll realise you’ll be just as happy (if not happier) with a scaled down version of a fancy modern life!
Take a look here at the science behind happiness to learn more.
Our thinking was, we can scale down and simplify our lifestyle and see if we’re still happy. And we are!
Then, once we reach financial independence we can always scale it back up later, from our position of strength, rather than have everything now with no alternative but to work forever.
So far, scaling back up doesn’t really interest us. And strangely, we’re much more satisfied with our lives than before.
I’m developing the unpopular opinion that inflation can actually be optional.
As the basics become cheaper over time, there’s little reason a frugal household’s cost of living will increase by much at all, if they so choose.
The point is, it’s much more controllable than we think. And we have more power than is assumed.
So there we have it. The inconvenient truth about the real cost of living. At least, from my perspective.
Now, I know it’s not what people want to hear. But it definitely needs to be said. And yet, I rarely see it mentioned anywhere.
It’s just a shame the drama-hungry media will only tell you about one or two outrageous price-hikes each year. And pandering to the victim mentality, despite the proof of our continually-growing prosperity.
If we’re brutally honest with ourselves, we know the true basic cost of living is very low. And it’s dramatically cheaper now, with our modern-day incomes.
In fact, there’s even research to suggest it’s going to get massively cheaper from here.
There’s simply no base for palming off responsibility. It makes no sense. Although there’s always exceptions, for the vast majority of us, if we’re struggling financially, it’s by our own design.
Most important of all, what we’ve discovered today shows us that we have a greater chance for financial independence than ever before. Never has it been easier to save, build wealth and retire young.
The sooner we recognise this inconvenient truth, the better off we’ll all be!
*For the folks who don’t like averages, the median full-time income is almost the same, at over $1,400 per week.
** Perhaps it’s called ‘disposable’ income for a reason, since that’s all most of us do, dispose of it! 😉
My thoughts on a behavioural trap I see in the FI community, how to recognise it and how to fix it. Far more common than you might think, and it can prevent you from enjoying the wonderful wealth you’re building.
Lizzie changed her career, moved location, sold her home and switched investment strategy. Now she’s looking to semi-retire in her 30s.
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“$14 pub beer”
Bloody hell I can sell it to you for a lot cheaper than that! Home brew rules????.
Haha, send over some samples mate. Might have to try making some again soon. Tried it once years ago, actually turned out pretty good!
You make a very compelling case. I’m with you on the media – I absolutely can’t stand those headlines about the cost of living ‘pressures’, like no-one has a choice! Would be great to hear more about this perspective in the media instead.
Even for the big earners, expensive housing and private school fees in particular seem to have become the new necessities that soak up a large part of that disposal income, no matter how high the costs get…
Thanks Frankie! Glad you feel my rage 😉
Haha that’s not going to happen, because people will become so outraged that at the lack of sympathy if we tell them ‘hey stop whinging, look how good you have it’. This article would be shot down, set on fire, holes poked in it with a barrage of angry comments on a mainstream media site. Would be funny to see though!
It’s a very emotional topic, because you’re basically telling people they suck at running their own life, financially speaking. I don’t mind so much if everyone admits their expenses are their choice. But I can’t accept playing the victim, palming-off responsibility and saying they have no alternative options.
That necessity list just keeps growing. Our ‘needs’ and ‘wants’ have become blurred to the point where people think they’re the same thing.
“I don’t mind so much if everyone admits their expenses are their choice.” Whew, I’m glad you said this. We fall into the “why are we spending so much money?!” camp, but you can see from our 2018 goals post – it’s quite simply because we don’t want to do what it takes to spend less. And there’s the phrase: want. We ARE making deliberate choices. We choose to have 2 cars and a motorbike. We choose to feed our cats premium food. We choose to spend a ridiculous amount on spending money. All I can hope is that we slowly work to change our mindset, so those choices become less important compared to FI.
That’s good to hear Mrs ETT. It’s so great you hold yourselves accountable for those decisions. Sadly, many people don’t. Hence the rant/post!
With such a healthy way of looking at it, I’m sure you guys will make some good progress (if you deem it worth it) 🙂
i believe it a also easier to do in early years. you tend to wish for more comfort as you grow old.
one strategy used is to live in the past: technology and human advancement s growth pace is insane and if you can start by just delaying joining everyone by a few years on embrassing technology you will gain YEARS in FIRE.
i really like your personal tone on this very detailled analysis
Thanks, glad you liked it.
That’s probably true. At least if you keep things toned down in the early days, you can much more afford to scale it up later if you prefer.
Yeah well said mate, that’s my point – even a simpler version of modern life is still ridiculously good 🙂
I wish I read this 10 years ago! I was earning less but spending way more. Oh well, the best time was then and the second best time is now. I’m no longer making excuses and feeling as if I deserve a ‘nicer’ life, I’m happy to keep things simple and I’m still just as happy (if not more).
I’d love it if you put together a similar sort of comparison on the rising cost of buying a house? It is a super hot topic, especially here in Sydney at the moment and I’d love to know what the numbers over time really say. Have wages risen at the same rate as housing prices? I find even a small apartment to be too much to justify buying 35km from the city, but unfortunately, that’s where the jobs are. I often wonder about the long term viability of renting (especially now with our landlord selling and us having to look for a new place asap) but that’s probably a whole other post again haha.
Thanks Miss B!
Appreciate you sharing. It’s interesting you say that, I much prefer our simple life these days too.
Haha yes, it would be possible to do that, but I’m not sure I could give much input on it. Here’s my thoughts on it…
The simple fact is that prices have definitely grown faster than wages, BUT, sevricing mortgage repayments is roughly the same if not cheaper because of interest rates declining. The catch is the deposit + stamp duty is now higher. But overall, it’s not drastically different. Still a 30 year mortgage is serviceable by many, even though the numbers are bigger.
It’s a tricky situation. If you plan on living there (in a particular property) for a long time, it probably does make sense to buy at some point (if you feel the need). But I definitely don’t think you end up worse off long term financially by renting, as some assume. If someone is investing all that extra cash, they’ll be better off later and can even buy a property with cash by selling off some investments.
What do you mean by the long term viability of renting? Whether it’s enjoyable long term?
Fair point, I agree I could service the mortgage, but getting the 25% (deposit + stamp duty & fees) seems like too much (eating an elephant analogy comes to mind). That’s why I’m renting and investing the rest in shares for the moment. I’m not sure I want to live here long term, especially when raising a family and even longer in the future to retirement, so eventually, a place in an area I’d like to settle would be good.
Long term I meant more around rent rising and earning going down or stopping in retirement. Perhaps I was more thinking about pensioners at the moment and how many of them are living week to week as their pension payment is taken up by mostly rent. I guess that’s what FI is all about, making sure you aren’t in that situation. I’ve still got many years ahead.
Thanks for the chat and sorry for taking over your post 😉
Haha all good.
Deposit hurdle is a biggie. But one can also buy with a smaller deposit, I think 15% or so and you don’t have to pay LMI. Even still, if you bought with smaller deposit, adding LMI to the loan will mean more interest long term, but not much difference in repayments (cashflow) which I think is probably the most important part.
That’s a good idea Miss B. Transaction costs are so high, it’s a killer and some people don’t even realise it. I know a couple who have had a mortgage for 40 years and still have it now because they’ve moved so many times. This is despite their income going way way up over the decades. Essentially if they stayed where they were they would have paid the equivalent of 2 or 3 houses off by now. And for some sad reason they think they’ve done well out of property because the price of the house has gotten higher over time.
Oh pensioners no doubt have it harder if they’re renting, especially in a capital city. That’s why we should do all we can to ensure we can fund our own retirement 🙂
Good post SMA, I think it also goes to show the importance of investing in assets that will increase the income to you faster than inflation once you have actually retired as well.
Mr DDU
Thanks Mr DDU.
Absolutely, that puts you in an even stronger position over time!
“Becoming financially independent is about taking full responsibility. It’s about owning your decisions and taking massive action.” Agreed! It feels like effective ‘adulting’ to be taking control of spending choices and discerning wants from needs. Even though some would point out my lifestyle as not being ‘grown up’ – eg. continuing to rent in a sharehouse in my 30s, not own a car and cook cheap meals at home – I know that being financially independent at 40 is one of the most mature things I can do!
Thanks Michelle. I think whatever your lifestyle is, being ‘adult’ is acknowledging that you’re entirely responsible for your own choices and you get to live how you see fit, with no excuses. Sounds like you’re ticking that box to me 🙂
We have unlimited spending choice these days! Open borders (relatively speaking) And much cheaper airlines tickets allow for spending where the dollar has ‘biggest bang for Buck’ in relation to your values. After reaching FI I reduced my annual spend by 80-85% and am happier than ever. Learning to spend with laser like precision was the biggest learning for me since I early retired two years ago. My saving rate is higher than before on the big corporate paycheck these days although my income is far less. It’s all about making the right choice responisbly like you pointed out in your blog post – beautiful.
Great stuff Gladiator. Sounds like it’s working out very well for you, and it’s good to hear from someone who’s enjoying their freedom in other countries!
I agree some things have gone down in real terms, and we have higher expectations. But I used to live in Sydney and my old flat has more than doubled in price. It isn’t bigger, it isn’t better, and it costs twice as much. Sadly, I was renting – I didn’t own it!!
Also, where I now live has no bulk billing doctors. I pay between $50 and $60 each time now. I used to see doctors for free.
That’s also partly why people say the cost of living has increased.
Thanks for your thoughts Jo.
While it’s true that some things have gone up quite a bit in real terms – Sydney real estate being an extreme example – we need to look at the whole picture and compare it to incomes. Perth real estate for example has gone nowhere for 10 years while incomes have continued to climb.
Also bulk billing doctors often come down to simply where you choose to live. There’s a number of them around my area.
My main message is that even though things have gotten more expensive, our incomes have increased far far more than our cost of essentials, over a period of 100+ years, meaning our disposable income and living standards are so much higher than they’ve ever been, despite the visible cost of things increasing.
I think the main thing that’s affects us now is house prices. When my step dad was in his 20s he was on a 6 figure income and could buy a house for 50k. Though he ending up upgrading and bought a massive house for 300k in his 30s. My mum before meeting him was a single mum with 3 kids and was a waitress yet she was able to buy a house on the beach on the Mornington peninsula. Which she sold maybe 7 years later and paid off hers and my step dads mortgage so they were mortgage free from their 40s. They retired by their late 50s, they didn’t have super but made so much money every time they sold their next few houses.
My granddad was an engineer, my Nan never worked. Just on his income alone they were the riches people I ever knew. They owned a mansion on the river in Noosa, travelled to Europe for 3 months of the year and bought the latest BMW every second year all with cash. Apparently my granddad once said he has so much money he didn’t know what to do with it.
Now I’m in my mid 30s and an engineer as well. My husband is an electrician and we cannot afford to buy a house. We have 3 kids and feeding and clothing them plus rent takes most of our money.
While I was doing my degree everyone talked about how much engineers made, but the growing number of graduates and some other factors must have changed that because by the time I graduated the average graduate wage dropped 25%.
I will never have the life my granddad had the money just isn’t there any more it’s more spread over a higher number of engineers, I can’t even have the life my mother had. She was a waitress and could afford an amazing house. We are dual income and can’t afford even the worst house in our suburb. So I don’t understand how we are better off. I feel like the house price to wage ratio has massively increased. Every adult I knew as a child owned a house . Even if they were in low income jobs, mortgages were just so small. I don’t see that happening now. I will never have the financial independence my parents and grandparents did purely because of house prices.
I am in similar boat. I am already in the late 30’s . I did some forecasting. I need atleast 10 more years to be FI. Atleast, I am on the right track of saving and investing( finally). I dont think I will become super rich ( can be FI though with a toned down lifestyle). But it will be a hard fight for the next 10 years. My parents are also dependent on me. But i dont think in this generation I can rely on my kids for retirement. I have to take the responsibility and be ready.
https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook46p/CostLiving
Australia’s cost of living over the last decade linked above was a good read
Looks quite good for ’employee’ households who avoid tobacco and conserve electricity 😉