The Inconvenient Truth About ‘Cost of Living’

Updated: 2025. Original article: 2018.

Here’s something that might surprise you: despite all the talk about the cost of living crisis, Australians today have roughly double the purchasing power we had 60 years ago.

Now, I know this might seem impossible at first. After all, your grocery bills keep going up, housing costs are high, and it seems like everything’s getting more expensive.

Inflation is a thing. But what if the real issue isn’t that life costs more – it’s that we’ve gradually adopted fancier lifestyles compared to previous generations, without really noticing?

I’m going to walk through the data and logic behind this unpopular view that I have, and explain why understanding this might change how you think about building wealth.

Most people struggle to become financially independent for one main reason: there’s very little cash left over after covering living expenses. I think we can all agree on that!

We’re reminded of it constantly. The media is quick to paint a bleak picture of the cost of living. Even our Reserve Bank tracks how the cost of goods and services increases each year.

And it’s important to track these things. But what if we’re looking at it the wrong way and missing the big picture?

The purchasing power reality

Most people think inflation just means prices going up, life get more expensive, and this makes us poorer over time.

But that’s only half the picture. Here’s what they’re missing: what matters isn’t whether prices rise – it’s whether prices rise faster or slower than our capacity to afford those prices.

Let’s say the cost of living goes up 3% per year, but household incomes increase 4% per year. Sure, things got more expensive. But we actually came out ahead – we have more money left over after buying the same stuff. Our purchasing power increased.

This is exactly what’s been happening for the past 100+ years. I covered this in The Great Divergence.

Basically, as we’ve become more productive and efficient over time, using technology and international trade, we can produce things faster and cheaper. This means our wages have consistently grown faster than the cost of basic necessities.

Most of us realise this has happened, even if we don’t think about it much. But when we look at the actual numbers, the difference is surprising.

How living standards have transformed

To understand how much purchasing power has improved, let’s look at a comprehensive study of American household spending from 1900 to 2000 (highlighted in this article).

Since Australia and the US have similar developed economies and living standards, this gives us a useful proxy for how things have evolved here too. If you’ve read my book you’ll be familiar with this study.

The transformation is pretty remarkable.

Back in 1900 – only a few generations ago – most families were focused purely on survival. Literally. They spent about 80% of their income on absolute basics: food, clothing, and very basic shelter.

Many lived on farms, few had electricity or gas, and flushing toilets were a luxury, and basically nobody had a car. What we’d call “discretionary spending” today AKA money left over for anything beyond survival, was only about 10% of their income.

By 1950, huge advances in technology and productivity had changed everything.

Food costs had dropped to 30% of household income, down from 40% before. Meanwhile, discretionary spending had grown to 21%.  People finally had more than pocket change left after covering the essentials – this often went to new appliances and conveniences, visiting diners and restaurants a little bit, and many even had cars.

By 2000, things took another big leap. Food and clothing combined now only consumed 17% of household income, compared to 57% a century earlier.

Think about what this means. In just 100 years, we went from spending almost everything on survival to having 40% of our income available for other things beyond very basic living.

Where did the money go? We’ll get to that in a minute. But let’s bring it to Australia specifically. How do our wages and living costs compare to previous generations?

Average Australian wages vs inflation

Instead of going back 100 years, we’ll go back almost 60 years to 1966, when Australia started using dollars instead of pounds.

In 1966, the average full time Aussie wage according to the ABS was around $60 per week.

In 2024, the average weekly earnings for full-time adults is $1,923 per week.

Now, people often say averages are skewed higher by top earners, so let’s look at the median instead. The median weekly earnings for full-time employees was about $1,700 per week in 2024.

So the difference between these two isn’t really that big. Let’s use the median to be more conservative (even though the average was used in 1966). OK, what about inflation?

Over that 58 year period, inflation averaged around 4.9%. At the same time, the average wage grew about 5.9% per annum – a bit quicker than the cost of living.

1% per year doesn’t sound like much. But if the average full-time wage just grew with inflation over that time, it would be about $960 today.

So, effectively, real wages and our purchasing power has roughly doubled over almost 60 years! If you go back longer, it’s even more.

So if we have twice as much income now, even after inflation, where’s the hell is the money?

The missing money mystery

Where did it go? A lot of things.

Housing for one. We built bigger homes and bid up prices – Aussies now have the largest homes in the world, more than double the size compared to 100 years ago (despite less people per household).

Almost anytime people have more money, it finds its way into housing – one way or another. When you realise this behavioural phenomenon, current prices make a lot more sense!

It also went to cars. You’ll notice the roads are littered with relatively new, large and fancy computerised cars. We can now travel internationally, often every single year.

We can enjoy regular restaurant meals and takeaway food without batting an eye. We have an endless supply of gadgets and electronics to keep us entertained and make life more convenient. And the three national sports seem to be home renovation, sports betting and online shopping.

Please understand, nobody lived like this before. And a lot of the world still can’t!

This study shows a very familiar pattern of human nature: as productivity and wages grow faster than the cost of basic necessities, we don’t pocket the difference. Instead, we upgrade our lifestyles to match our increased purchasing power.

In short, over time, our lifestyles got a whole lot fancier and spendier!

We’re clearly not just surviving anymore, with a tinge of comfort. The comfort level has been pumped full of steroids, filled with hot air and shot out of a cannon, headed to the moon!

We find ourselves living this modern life that nobody could even imagine 100 years ago.

This is the big macro version of lifestyle inflation. Unfortunately, we tend to have very short memories and we don’t even realise it’s happening. Well, maybe some of us do.

Also, let’s be clear, I’m not trying to criticise anyone for enjoying any of these modern perks. I enjoy it too. But I also see things a little differently. All this data is actually telling us something pretty powerful.

Basically, a lot of our spending is on things that are completely optional! That’s the inconvenient truth that nobody wants to admit.

If that wasn’t true, it would literally be impossible for anyone to retire before getting a pension. Let alone to do it in their 40s or 30s. Let alone do it on a relatively normal wage. Let alone have tens of thousands of people on their way to being financially independent.

In fact, if that wasn’t true, you would’ve never heard of me and the FIRE community wouldn’t even exist.

Now, you could argue that house prices should be included in the inflation figures, which they’re not – only rents and building costs from what I understand. That’s fair. But as we can tell from the sheer difference in lifestyles, there’s a TON of optional spending going on.

I know many of you will agree with this or at least admit you know it’s true, but will point to housing as the ultimate boogieman as to why nobody can get ahead. And while housing is a hurdle, I do believe this story is overblown and we have more control over it than many like to believe.

The average loudmouth on the internet – and the media – likes to paint us as all being completely helpless and assuming the only option is a complete shitbox in a rough area, moving house as a renter every single year forever, or a 1.5 million dollar mortgage.  I’ll deal with housing other articles of this blog, with future topics like ‘why you won’t be priced out’ and ‘how to own a home without killing your finances’.

Back to our inconvenient truth

So we’ve discovered our basic living costs are much cheaper than they used to be relative to what we earn. And most of us – whether we like to admit it or not – have plenty of disposable income that people never used to have!

Unfortunately, the supposed sky-high cost of living doesn’t exist. We’re not in a cost of living crisis – for most of us, it’s simply a cost of lifestyle crisis. The way we want to live is expensive… somehow always magically at the very edge of what we can afford. Funny how that works isn’t it?

Nobody wants to say that. But it’s true. We just have a short memory and little awareness and appreciation for how people used to live not that long ago.

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 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 any of our habits or behaviours. We don’t have to reflect on our sub-par choices. Instead, we get to continue our semi-affluent lifestyle, without being affluent.

The common mantra that is peddled by the media goes something like this: “It’s so hard to save. Aussies are doing it tough. Life is expensive. And the cost of living is going through the roof.”

Time to call BS and take control

The media peddles this narrative for one simple reason: it’s exactly what people want to hear. They want to hear it’s hard. It validates their frustration around why their life isn’t exactly the way they want it. It lets them off the hook.

See, self-reflection doesn’t feel good. It’s uncomfortable. Accepting that maybe your life isn’t what you want it to be because of your own decisions tastes horrible to a group of people who are fed sugary lies and comforting falsehoods.

Ever notice how we hear endlessly about things that go up in price, but never about things that become more affordable?

We don’t hear about how our smartphones now do what used to require tens of thousands of dollars worth of separate devices – a mobile phone, a computer, a video recorder, a high-end camera, live GPS system, and a ton of other things.

We don’t hear about how affordable flying has become, locally and internationally. Travel and flying was literally only for rich people before!

The reality is, over the long run, our wages have far outpaced basic living costs. We’ve just unconsciously decided our standard of living needs to stay on a permanently upward escalator.

Our idea of ‘basic living’ endlessly goes up according to how much money we have. We keep moving the goalposts on ourselves, driven largely by clever marketing, our own insecurities, and human nature.

But the path to financial independence is built on taking complete responsibility. It’s about owning your decisions and doing everything you can to create the outcome you want.

It means no excuses. It means finding workarounds. And it means designing your lifestyle consciously, one decision at a time, rather than just going with the flow and accepting whatever everyone else accepts.

Every single day, with every single choice we make, we’re either building our future freedom or we’re not. And this should be empowering! Never in history has it been so possible to build wealth and retire early for the average person.

A hundred years ago, people had little choice but to spend almost everything just to survive. Now, we need only maybe half our wage for the same thing. The rest is completely up to us.

The truth is, we’re not owed some particular lifestyle. And what we think will make us happy in terms of material comfort, usually won’t do anything except increase our new baseline ‘needs’.

We’re incredibly fortunate to be living in this time and place, with opportunities that most of the world doesn’t get. You can choose to take this opportunity for financial independence. Or you can choose to join the endless consumption game and the permanent job slavery that comes with it.

It doesn’t really matter which you choose. Just realise that you are choosing..

So what now?

Look, I’m not saying you have to isolate yourself and sit in a dark room eating rice and beans (although I can think of worse things!). But for every expensive choice we let creep into our lives, there’s a cost.

Money is freedom. So as I like to say, you’re not just spending your money – you’re spending your freedom.

For those ready to take this seriously, one approach is to start from scratch. Design your life from the ground up. Start from scratch and scale it up one thing at a time. What’s worthwhile adding and what’s not? Truly focus on what’s going to lead to the life you want over time.

You might discover, like we did, that a simple version of modern life is already pretty damn good. It may be less fancy than a lot of people – but you can get a very similar lifestyle without tying yourself to a 40 year career.

If you do this, you’ll worry less about money and have incredible peace of mind, knowing you’re building choices and massive optionality.

Then, once you reach financial independence, you can always scale up your lifestyle from a position of strength. But most people do it backwards – they want everything now and wonder why they can never get ahead!

The truth is, our cost of living is far more controllable than most people think. And this means you have far more power over your financial future than most people think.

Final thoughts

Most people’s financial stress doesn’t come from trying to survive – it comes from maintaining a lifestyle that would have seemed like crazy luxury to previous generations, yet they’re convinced it’s just ‘normal.’

The media feeds the victim narrative because it gets clicks, leaving people feeling helpless rather than empowered. But there’s an opportunity here. You can break from the norm, be way more thoughtful about your money, and create a different future.

Start by auditing one area of spending this week. Calculate what that money could become if you invested it instead. Then decide: is this expense improving your life… or limiting it?

The opportunity for financial independence is as available now as it’s ever been  – but only if you choose to see it.

Here are some resources you might find helpful:

📘 My Book
Your complete guide financial independence in Australia.  Available on Amazon, Audible and Spotify.

🏡 Mortgage Broker
Deanna and her team have helped me and many readers with home loan strategies over the years (including debt recycling). Check them out.

💼 Financial Advice
For those wanting personalised guidance with strategy, super, tax, or retirement, I can connect you with someone I trust. Find out more.

If you use the above services, this blog may receive a benefit at no extra cost to you. I only recommend things I use myself and genuinely believe in – thanks if you choose to check them out.