If I make more money, I must HAVE more money, right?!
When people asked me how much I made (back when I had a job and felt it was contextually appropriate to share such traditionally-intimate information), I told them $110,000.
I made a big mistake. My mistake was not sharing intimate information. My mistake was sharing THAT specific type of information AND believing it. Why? Because my gross income is irrelevant. And so is yours.
Many people might assume the natural digression of this argument is leading to after-tax income as the supreme form of measuring our true level of income. Well it’s not.
- For those who are curious, after-tax income is your gross income minus the taxes you pay. It's the amount you actually take home after the government takes its share. While this figure is certainly more relevant than gross income, it still doesn't tell the whole story of your financial situation.
I’m suggesting we focus more on our lifestyle-adjusted income.
[ Lifestyle adjusted income = Gross income - Taxes - Inevitable lifestyle expenses ]
By the way, if you’ve picked up any tone of sass so far, you’re right. This subject has been on my mind for quite a while and it’s about time I vented!
What is lifestyle-adjusted income?
Lifestyle-adjusted income is quite similar to lifestyle creep and lifestyle inflation.
- Lifestyle creep and lifestyle inflation are the increase in spending as one's income grows, often without the equivalent increase in contributing to your savings.
I’m proposing that the primary difference between lifestyle creep/inflation and lifestyle-adjusted income is that the costs of the latter should be looked at as inevitable.
- A good way of differentiating creep vs. adjusted income is thinking about someone living a lifestyle that requires a car. The car itself is an inevitable expense. When someone upgrades their inevitable car when they do not need to, it then becomes lifestyle creep.
The way I see these inevitable costs is that they come with the lifestyle. They are not chosen afterwards (like in the instance of lifestyle creep) but are largely attached to the profession and location we choose in life. Again, you might choose a profession or location that requires a car (inevitable), but you may choose to get a more expensive car (creep).
What are inevitable lifestyle costs?
Many costs in our lives are inevitable. The necessities of food, water, and shelter come with a price. Additionally, for arguments-sake, society makes it difficult to live without connectivity and modern mobility so add in the inevitable expenses of a phone plan and some form of transportation.
Now factor in your lifestyle. Your lifestyle, largely determined by your profession and the location you choose to do work in, will significantly influence the expenses associated with these inevitable expenses.
Let’s look at a simplified example of 2 PEP employees with different lifestyles, Peppa, and Pepe:
- Peppa, lives in a small town in Canada.
- Peppa earns $50,000 gross income per year.
- Peppa pays $400/month for rent ($4,800 total per year).
- Peppa’s lifestyle adjusted income = $45,200
- Pepe lives in the bigger city of Toronto, Canada.
- Pepe earns $60,000 gross income per year.
- Pepe pays $1,250/month for rent ($15,000 total per year).
- Pepe’s lifestyle adjusted income = $45,000
- Pepe’s chosen lifestyle has committed them to paying approximately $850/month more ($10,200 per year) than Peppa’s lifestyle.
- Despite Pepe’s gross income being higher, Peppa’s lifestyle adjusted income is higher in this simplified example due to the cost of living impact.
In reality, rent is just one piece of the puzzle.
Consider someone working a time-demanding profession, making 6-figures gross income, living in Toronto, Canada. This individual consistently runs short on allocating time to other parts of their daily life, and their inevitable lifestyle costs pile up.
- Constantly getting breakfast, lunch, and dinner on-the-go because they’re short on time.
- Home cooked meals are provided by meal prep service companies such as Hello Fresh and Good Food.
- Hiring a cleaner, and/or caregiver, and/or dog walker to take care of various household responsibilities they cannot get around to.
- Buying groceries but being unable to use them all before they go to waste.
- Being stressed at work and requiring an expensive vacation to decompress, potentially multiple times a year.
- Unable to allocate time to their health and wellness, requiring them to hire a personal trainer, wellness coach, and/or dietician.
- Working in a formal work environment requiring expensive work attire and dry cleaning bills.
- Needing to live within commutable distance to the office causing increased rent or mortgage commitments.
Before you know it, this individual's gross income is looking like a lot less. Perhaps it’s still higher than someone else living a different lifestyle, but the actual lifestyle adjusted income may be low enough for you to reconsider if the time-demanding profession in the high-cost of living location is worth it relative to any alternative.
Plus, we haven’t even factored in the very real influence of lifestyle creep (again, voluntary) such as having a nicer home in a nicer neighbourhood, getting a more expensive vehicle, etc.
If there is one thing you take away from this blog post, let it be this;
“Inevitable lifestyle expenses are lifestyle driven, and if our lifestyle is not inevitable, then the associated inevitable expenses are not either.”
Inevitable is context driven
These various lifestyle costs are inevitable when the lifestyle is present. The big mistake we often make is assuming that the lifestyle is inevitable too. Ella and I assumed it was too.
Ella and I were living a lifestyle where we had the inevitable costs of rent, apartment insurance, monthly utilities, car payments, insurance, charging our car, buying groceries, buying takeout when we were busy, and committing to large phone plans to support our lifestyle.
We slowly realized that many of our primary expenses were determined by our lifestyle. We asked ourself if we could change our lifestyle and hence the associated inevitable expenses.
In September 2023, after months and months (probably years) of deliberating and planning, we moved out of our apartment and set off as digital nomads. In the past year, we have travelled to Portugal, the United Kingdom, Barbados (4 times), the West Coast of Canada, Costa Rica, Bolivia, and Chile.
In this time, we have significantly reduced most of our inevitable expenses from our existing lifestyle…
- We lowered accommodation costs through a combination of staying with family, housesitting, and living in low-cost of living locations.
- We reduced our utility expenses effectively to $0 by using wifi, heating, and cooling at the accommodations we visit.
- We eat takeout much less as we now have the time to grocery shop and food prep.
- We now pay $22/month for our phone plans vs. +$60/month before. We use digital eSIM top-up providers such as Airalo to remain connected globally for less.
How to calculate your lifestyle adjusted income
This personal finance calculation requires a simple formula:
[ Lifestyle adjusted income = Gross income - Taxes - Inevitable lifestyle expenses ]
So when I left my $110,000 job in early 2024, I originally had the mindset of needing to replace my $110,000 of income. BUT I DIDN’T HAVE THAT MUCH MONEY IN THE FIRST PLACE.
- -$25,000 owed to taxes.
- -$12,000 owed to rent.
- -$2,400 owed to takeout
- -$960 owed to our internet bill
- -$720 owed to phone plan
- -$600 owed to charging our car
- Approximate Lifestyle adjusted income = $68,320
I had $41,680 less than I thought I did because I focused on gross income. I was drastically over-inflating how much money I had. If I changed my lifestyle, I could change the inevitable lifestyle expenses that came along with it.
Now, to summarize these thoughts above…
- Gross income is irrelevant. Unless you’re calculating your taxes, wipe it from your memory.
- Lifestyle adjusted income and lifestyle creep are not the same thing.
- The profession and location we work in significantly influences our lifestyle which comes with inevitable lifestyle expenses. The more costly the city we live in and the busier we are, the higher these expenses are. The more affordable and less busy we are, the lower these expenses are.
- Think about expenses such as rent, food and takeout, cleaning, transportation, etc.
- By acknowledging these inevitable expenses, lifestyle adjusted income is a more effective way to measure your actual income and understand the impact your lifestyle has on your financial freedom.
- You can more accurately see how much of your income is automatically tied to the lifestyle you’re living and largely out of your current lifestyle’s control (unless you change your lifestyle).
- After calculating your lifestyle adjusted income, you can make a more informed decision on whether or not the profession and/or work location are worthwhile for the actual amount of money you’re earning, amidst the various tradeoffs of the inevitable lifestyle expenses you’re tied to.
Quick question for you!
Do you think lifestyle adjusted income is a valid way of measuring your actual income or am I out to lunch? Let me know!
