For years I have had a target financial independence number. But now inflation is 6.2%, am I revising that number upward? Are you adjusting your financial independence number for inflation?
Origin of Our Financial Independence Number
When I started this site 5 years ago I set a target in my mind for what I wanted my net worth to be at retirement. That number was well thought out, with an eye towards my current spending as well as future planned outlays. I wouldn’t say it was perfect since at the time I was planning to retire at 55, a period well past when I would hit that number. But it was a good guard rail.
Low Inflation meant no Adjusting My Financial Independence Number
And that is where that number sat year in and year out. Sure, inflation existed each year, at around 2 % each year according to the CPI. But let’s be honest, over 5 years 2% inflation doesn’t amount to much. It would be about 10.5%. And that assumes my expenses changed at the same rate as the CPI, which they have not.
My Inflation Versus Aggregate Inflation
Inflation is measured for the country in aggregate using CPI, but each person experiences inflation differently. I have fixed housing costs, a short work commute, am not into fashion, travel mostly using credit card hacking, and keep my cars for decades. As such I barely notice inflation most years. My inflation rate is no doubt well below CPI in a typical year which is why adjustments to my financial independence number for inflation were not necessary.
If I were an individual with a long commute, renting, and other factors my costs would probably have increased 10% over that period, and I would have needed to increase my target financial independence number for inflation. The only reason to change my number was if my expenses actually changed. They did not over that 4 years, so the number remained constant. If they had behaved differently, I had planned to adjust my target at that time, rather then commit the fool’s errand of predicting future inflation. But what about now, with inflation around 7%?
My Current Inflation Experience
Well, I have been open that my expenses have been way down since Covid started. In fact, I wrote this piece about difficulty budgeting due to Covid expenditure changes. Many people I interact with have seen their costs of living increase dramatically as things have opened back up. But to be honest, I am still not one of those people.’
Variable Travel Trailer Expense Reductions
Why you might ask? Well let’s see. All my travel this year has been of the travel trailer variety. The purchase of said trailer was done last year with some excess cash. I am not amortizing the trailer over time nor am I really considering its purchase in my yearly target cost outlays. It is in the lump long-term headroom I gave myself when I originally set my target financial independence number for expenses plus overhead like future vehicles and college expenses.
While I would be stupid to present the trailer as a cost savings move, i.e. the cost of the trailer amortized via trip is by no means a discount on hotel rooms, having said trailer does mean my variable yearly expenses for travel have declined. This is especially true when I note I am still travel hacking the same amounts I did in prior years. I am just driving to campsites instead of flying to a hotel in Europe. You can easily see how that net reduces yearly expenses.
Other Expense Reductions
But that is not the only drop in expenses for us. Our state made the decision that all children in our school district get free school lunches. This was never the case before the pandemic. So, while food bills have risen for many due to inflation, ours is down from pre-Covid.
We also have reduced the number of sports team memberships for our kids, delayed some home improvements we normally would have executed, and a bunch of other small changes. Oh and of course we paid off our mortgage 6 months before Covid.
What that all means is our expenses are about 2/3 of what they were before Covid even after accounting for our mortgage. IE. Our expenses have no relation to country wide inflation currently.
2019 As a Baseline for Expenses
To date I’ve basically continued to measure everything as 2019 numbers and targets. This is under the assumption that things like international travel, sports team memberships, home improvement projects, and paying for school lunches will all make a return at sometime in the future. That all is well and good when we are just talking about setting a success metric like saving money. But I wouldn’t recommend doing something like retiring on such nebulous data.
Am I Adjusting Our Financial Independence Number for Inflation?
So, am I adjusting my financial independence number up considering the current inflation? No, I have decided to punt. I am 3 years away from hitting my previously set retirement number. I suspect my expenses will stabilize somewhere in that 3 years. So, I have decided to continue to monitor my expenses over those 3 years. If/when they go up, I can adjust my target rate up then. Could that lead to 1 more year syndrome? Maybe, but it’s worth it to make an educated decision on whether to pull the plug at the appropriate time.
Have you seen an increase in costs this year? Have you increased your financial independence number for inflation?