Ep 24: Lifestyle Inflation - Blocking and Tackling in the Financial Trenches

Episode Description

Join Big Bo (a.k.a. Jason Blumstein, CFAⓇ) where he delves into the critical issue of managing wealth as your income grows. Tune in for insightful discussions and practical advice including:

  • Uncovering the Hidden Dangers of Lifestyle Inflation: Understand the subtle yet significant impact of lifestyle inflation on financial health.
  • Real-Life Scenarios: Insights from the experiences of pro athletes and business executives on managing wealth and spending
  • Strategic Financial Plays: Learn key tactics for budgeting, investing, and sustainable wealth management
  • Actionable Advice for Long-Term Wealth: Tips on aligning lifestyle choices with your financial goals for lasting prosperity

Hope you enjoy the $how!

Episode Transcript

Welcome to episode 24 of the Big Bo $how. Picture this, an athlete at the peak of their career, millions in the bank, but then fast forward a few years, and they're struggling financially.

We see this all the time, and unfortunately, this isn't just a cautionary tale. It's a scenario that's all too common among those who don't play the long game with their finances. Why does this not only happen to professional athletes, but to countless others as well? In my experience, it's because people often measure the world around us by what we can see.

If our family is smiling and laughing, we assume they're happy. If we see a team up on the scoreboard, we assume they're going to win. If we see someone driving an expensive car, or wearing an expensive watch, we assume they're successful. I see this mindset every day, and frankly, it’s sickening.

The more money people bring in, the quicker they look to spend it. A raise leads to new clothes, a bonus leads to a bigger TV or a nicer car. People are obsessed with the idea of looking wealthy and successful rather than being wealthy and successful and while the past two years everyone has been talking about ways to combat inflation in our goods and services. The truth is the stickier more destructive inflation is lifestyle inflation.

So on episode 24 of the Big Bo $how, Lifestyle Inflation - Blocking and Tackling in the Financial Trenches, we're going to dive into lifestyle inflation, understanding it, giving real life examples, and importantly, ways to combat it. And be sure to stick around to the end where I discuss how lifestyle inflation Affected my favorite baseball team, the New York Schmetz. So sit back, relax, and welcome to episode 24 of a Big Bow $how.

Alright, let's get after episode 24 of the Big Bow $how. In this first segment, we are going to understand the sneaky opponent of lifestyle inflation. First up, let's break down what lifestyle inflation really is. Imagine this, you're climbing up the career ladder.

Your income is growing, and so is your spending. It's like every paycheck is a pass you're catching, but instead of running towards the end zone, you're heading out of bounds. Lifestyle inflation is when your expenses increase as your income goes up proportionally. And trust me, it's a sneaky opponent.

Let's zoom in on some real life examples to see how lifestyle inflation plays out in the real world. It's like film study. You gotta see it to understand it So let's get after real life example number one and let's talk about the professional athlete You see picture a pro football player They signed a multi million dollar contract and suddenly it's luxury cars big houses and extravagant vacations Every dollar earned is a dollar spent.

But then comes the change. An injury, an early retirement, the big paycheck stops, but the big bills do not. And we see this scenario unfold all the time. In the professional world now, they're facing a financial crutch. The savings are minimal because everything they made went towards maintaining a high-flying lifestyle It's a classic case Of scoring touchdowns, but losing the financial game.

So what are the discussion points here? First is sustainable spending. How could our athlete have played it differently? By focusing on sustainable spending, living a comfortable life, but also saving and investing for the long haul. Realizing and understanding how a few major windfall years Most likely won't last forever.

You are young, and you need to plan to a sustainable life to live off of after these few windfall years for the rest of your life. And this comes to the importance of financial education and financial literacy, something that we always talk about in the Big Bo $how and is a core value of Julius Wealth Advisors.

Knowledge. This is where financial literacy steps in. Knowing how to manage that windfall. Invest wisely and plan for the future. Realizing and understanding how a few major windfall years most likely won't last forever. You need to understand financial literacy. Literacy. And this isn't just pro athletes, this also happens in the lifestyle of entertainers.

You have big windfall years, lumpy paychecks. You need to understand how to live sustainably off this. Enjoy the present, but plan for the future. Let's go on to real life example number two. The business executives cash burn. So here's the scenario. They hit it big with stock options and suddenly it's a spree of the latest tech gadgets, private jets, and Michelin star dining.

They're living the life. They've made it up the corporate ladder or starting their own business, but then the change occurs. Business sometimes is a rollercoaster. There's market downturns, a bad product launch, and suddenly your stock or your business isn't worth what it used to be. So our executive is now in a tight spot.

The lavish lifestyle has become a liability and scaling back is harder than scaling up. You're now used to this lifestyle. So what are the discussion points here? What are some of the things to think about? Risk management. A crucial play here is risk management. Diversifying your investments. Not just relying on risk.

Your company stock or the value of your company if you're a business owner Using the cash flow from your business to balance out your personal side of the equation How do you get the cash flow from your business to balance your personal life? To create more of that financial homeostasis Also lifestyle resilience building a lifestyle that's resilient to market ups and downs It's like having a strong offense and defense in football You're prepared no matter what the market throws at you and I think to make this a little bit more tangible Let's look at a company that everybody knows.

This is not an endorsement for the company. It's just a company that everyone knows and a lot of people know the history of Apple. Apple, as everyone knows, the founder was Steve Jobs. But then Steve Jobs was actually fired by Apple in 1985. And then brought back to run the company in 1996. During 1985 through 1996 the business was floundering, the stock price went nowhere.

So they brought Steve Jobs back. But did you know that from 1985 to 1996, the revenue of Apple actually went up by five times? It went up from $2 billion to $10 billion. So why did the stock flounder? Why was the business floundering? Because their expenses were going up at the same proportion.

And their profits went nowhere. Apple as a business was suffering from lifestyle creep. Their revenues went up, but their expenses went up in line, and the stock price went nowhere. Because at the end of the day, just like your life, and just like in business, the way we move forward is by having cash flow and profits.

Profits that are used to reinvest for growing yourself and or growing your business in a smart way. So, post 1997, you will see That the profits of Apple really started to take off and so too did the stock price of Apple. But here's the reality check. These stories aren't just tales. They're cautionary reminders that no matter how high your income is without smart financial strategies you're always one play away from a financial disaster.

Think about the long game. Big income. Big spending but bigger planning. That's how you stay ready when the game changes You got all that great. So next up we're going to talk about how to defend against lifestyle inflation And make strategic plays with your finances We're going to take a quick break, but stay tuned after the break.

All right, welcome back Now that we understand lifestyle inflation We need to know Signs in our own life and ways to combat it quickly. Here are five signs of lifestyle inflation number one upgrading living arrangements beyond your needs This includes moving to a more expensive home or apartment, especially when your current living situation meets your needs.

This includes buying a larger house, renting in a pricier neighborhood, or frequently upgrading your living space without significantly Changing your family's size or needs. And on this point, one of my idols and mentors in Charlie Munger recently passed away, as many people know. But did you know Charlie Munger, who was Warren Buffett's right hand man, a multi billionaire, lived in the same home for 70 years until he passed away.

His thoughts were, well, I have the same utility in this home that I would get in any other home, but it's just going to cost me more. So let's move on to number two. Increasing Luxurious purchases. This includes regularly buying more expensive items than you need to. Whether it's clothing, gadgets, cars, or other personal items.

For instance, switching from mid range to high end brands for items that were previously considered satisfactory. Now I'm not saying to never do this, but there's really No significant difference between constantly buying luxury brands, then going for normal everyday brands. You get the same utility out of it, but you're spending more money on depreciating assets.

Number three. Frequently dining out at expensive restaurants and expensive entertainment. This is pretty straightforward. You're going out for dinner more often. Versus eating at home, at high end restaurants, or spending more on entertainment like concert, clubs, events, as opposed to more friendlier things and home based activities.

Number four, vacations and travel upgrades. Again, straightforward, taking more lavish vacations or opting for more luxurious travel options, opting for first class flights or five star hotels. More often than you used to, especially when these choices significantly strain

And number five, increased reliance on credit and reduced savings. This is a big sign. Pretty simple again and straightforward. Are you relying more on credit cards and loans for purchases and noticing a decrease or stagnation in your savings? Well, this is probably a sign of lifestyle. Recognizing these signs is crucial in addressing lifestyle inflation and ensuring that your financial health remains robust, even as your income groans.

So now that we scouted our opponent, we watched some film, it's time to put together our winning plays. Combating Lifestyle Inflation is about defense. And offense. Budgeting and smart spending along with investments. You got your defense. This is your budget. Your budget is a must. You have to outline your income.

Most people have a decent idea of what their income will be. Especially if you're a W-2 employee, meaning you work for someone else. You know what your income is going to be. Or you can project out what your income will be if you're a business owner or an athlete or an entertainer for the year but the more important piece is projecting your expenses going line item by line item and Understanding what your expenses will be you have things that you know You're going to have to spend on whether it's your mortgage slash rent health insurance a car You might want to budget in a line item for a vacation.

There's known things that you're going to spend money on. But then there's also this piece called lifestyle expenses. This includes more variable things like dining out and entertainment. You want to put a line item in there to make sure that you're keeping yourself honest. Because if you project out your income and you project out your expenses, you should have some excess cash flow income minus expenses Equals cash flow if you do not have any cash flow Well, guess what now you got an issue and your defense is weak So then you're going to want to probably take a scalpel to your expenses.

Number two is your offense smart spending and investing Let's talk about spending. When you spend, make it count. It's about advancing towards your financial end zone. So some smart spending questions to ponder, to ask yourself before you spend. Is this an investment or simply consumption spending? Will this enhance my well being or contribute to my personal growth?

Could I get the same benefits from a less expensive option? And my favorite, Can I calculate a tangible return on my spending? So the next piece of the offense is investment strategies. Investing is how you score points in the financial world. Instead of letting extra income or extra cash sit idle, or spending it on depreciating assets of money sitting in the bank, people often tend to spend it.

The trick is to redirect it towards assets that should appreciate over time. Just as a diversified sports team has a better chance of winning, a diversified investment portfolio can help you reach your financial goals. This might mean things like maxing out retirement accounts, investing in quality publicly traded businesses, or even starting your own business.

Whatever plays to earn a chance for your money to work for you, versus you working for your money. So let's go into some of my personal insights and tips. Big Bo's personal insights and tips. I'll be wrapping up. Avoid temptation. Discipline is key. Resist those flashy, unnecessary spends. Remember, we're playing for a dynasty, not just a winning season.

Next is regular financial reviews. This could be with a wealth advisor. Maybe even us here at Julius Wealth Advisors. The point is to check in and have regular financial reviews just like in football You'll see in football they huddle after every single play When the offense is off the field or the defense is off the field They sit down and they talk to their coaches regular reviews These huddles are crucial for the games in football to make Changes in strategy or make sure everyone is on the same page and it's the same thing with your finances Review and adjust your financial strategy to stay on top of your game the next and important I'll stress this Very important is coaching and mentorship.

Learn from others. Get a mentor. Get a coach. You see this in sports. The Patriots had Bill Belichick. The Packers back in the day had Vince Lombardi. My Miami Dolphins, probably too soon to put them in the same camp, they have Mike McDaniels. He made a huge change in the Miami Dolphins when he came in. My mentor, when I was learning about finance, and personal finance with Charlie Munger and Warren Buffett.

I constantly consume books and literature and to learn as much as I can about them. Play for the long haul. Life is a marathon, it's not a sprint. Which means keeping your eye on the long term prize. In other words, it's about winning a championship, not a single game. You can play for more than a season.

You can play for a lasting Dynasty, if we understand and combat lifestyle inflation. So let's take a break and then let's come back with the final segment. Bo knows segment. Everyone's favorite segment of the show. Bo knows where I'm going to compare lifestyle inflation. To some known sports teams, we'll be back.

Alright, welcome back to the final segment of episode 24 of the Big Bo $how brought to you by Julius Wealth Advisors. Lifestyle Inflation Blocking and Tackling in the Financial Trenches And this final segment is everyone's favorite segment, Bo Knows. And what we're going to do is show you examples of Lifestyle Inflation and also the combating of Lifestyle Inflation in the world of sports.

So first, Is lifestyle inflation gone wrong in the world of sports? This example is my New York Schmetz. As many people might know, the New York Schmetz spent a record 353 million dollars on their payroll this season. And what was the results? Finishing under 500, only 75 wins, about 25 less than last year.

And they didn't even come close. To making the playoffs and ended up trading away a lot of these high priced players towards the end of the season. Lifestyle inflation going wrong. Revenue going up, spending going up even more. Results going down. Similar to the Apple example when they fired Steve Jobs.

Now let's talk about lifestyle inflation gone correct potentially in my opinion. There is big news over the past few weeks about Shohei Ohtani signing a 700 million dollar 10 year contract. 700 million dollars, the largest contract in North American sports history. History and people were going bananas.

Wow. How can you spend so much money on a player? however Then news started to come out about how this contract was Structured Shohei Ohtani in my opinion a great way to combat lifestyle inflation within his contract So let's break this down and Shohei Ohtani’s contract. He's set to make two million dollars Over the next 10 years per year, $2 million per year over the next 10 years, and he's going to defer the remaining money over the next 10 years.

From 2034 to 2043, he's going to get $68 million per year. So he is essentially deferring $68 million per year over the 10 years of his playing days. 'cause odds are in 10 years, he'll probably be retired. He's deferring this. Which is not only going to help him, his team, in the pa in the present and in the future.

So in the present, now his team has a lot more money to build the team around him. To help him be successful in his playing days. Thinking long term, like it looks like Shohei Ohtani and people advising him did. When he's no longer playing, instead of having those few years of lump sum, windfalls. He's now spreading his money out to his post playing days to combat lifestyle inflation.

Which, in my opinion, is a fairly genius move. Both thinking about the short term, medium term, and long term. So here we have examples in the world of sports of lifestyle inflation going wrong, in my New York Schmetz, and potentially, in my opinion, going right. In Shohei Ohtani’s 700 million contract. So let's wrap up episode 24 of the Big Boat Show.

In this show, we defined what lifestyle inflation is, along with real life examples, giving five signs of lifestyle inflation. We also talked about ways to craft your defense against lifestyle inflation, which is budgeting and then crafting your offense, which is smart spending and investing and then implementing the secret weapon of having coaching mentorship and regular huddles or financial reviews So I hope you enjoyed episode 24 the Big Bo $how lifestyle inflation blocking and tackling in the financial Trenches, so please feel free to reach out to us

And as I end every show, I'll remind you to live a life of integrity, live a life of obtaining as much knowledge as you can, and always live a life That you're passionate about. Until next time, all the best. Thank you for tuning into the big bomb show.



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