The Lifestyle Line

No-one likes hearing about life’s trade-offs. We want to have our cake and eat it. But we’re not in Disneyland, and there’s no Magic Kingdom. So we’re left with a choice: either we can ignore the trade-offs and hope they go away (good luck!), or we can take charge of them.

At one extreme, some ‘experts’ would advise you to ‘save everything now, and one day you’ll be rich’. Don’t listen to them! You can’t be a miser for thirty years and then suddenly begin your dream life. Think about it – do you know anyone who’s been successful like this?

For starters, you’ll have no friends – because no-one likes a miser. Then, even when you’re wealthy, you’ll think about where you can cut corners and spend less. Money will cause you stress, because you’ve developed a habit for so many years to spend as little as possible. You’d be better off chilling out and working a few more years. The objective isn’t to maximise your bank balance – the objective is to be financially free to do what you enjoy. Being a miser doesn’t achieve that.

At the other extreme, if you ever sought financial advice on TikTok (don’t do this at home kids), you’d see ‘influencers’ telling you to ‘live for the moment’, to spend it all because you might not live past 28. Look, I get it. You might die at 28. But you’re more likely to live past 80. They’re just playing on your dreams to sell you an unrealistic path. Meanwhile, they get rich by promoting products.

There’s a huge middle ground between these extremes. Let’s explore it further.

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I’m going to share with you a concept called the Lifestyle Line. It has profound implications on the trade-off between spending now and spending later.

Let’s start with the chart below – this assumes a constant level of lifestyle across time. That intuitively makes sense, because our trade-off between now and the future is neutral – we’re giving equal importance to both.

So what happens if we sacrifice a bit now to give a little more for the future? Perhaps it’s saving for a better retirement, a bigger house or just some extra comfort so you can pursue your dream job in a few years.

We would think the trade-off is like the chart below, i.e., if we give up a small amount today (Area A), we can have the same amount back in the future (Area B):

But it doesn’t work that way.

Recall our discussion on compounding. If you save and invest today, your money will grow over time.

Let’s put some numbers to this. Imagine your Lifestyle Line goes from age 25 to age 65.

If you save an extra £5k/year for the first twenty years, and earn 8%/year returns, you could have an extra £15k/year for the second half. And that’s after adjusting for inflation. Every £1 you spend today is a trade-off for £3 later on. It’s not a one-for-one trade-off.

So the realistic chart looks like this:

I can see your next question. ‘If a trade-off now is worth three times as much in the future, are you telling me to spend less now?’

The answer is no, I’m not telling you anything. My aim is to share the right framework. Then it’s up to you to decide.

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Here’s one more thought.

Consider how you spent your money five or ten years ago? With the benefit of hindsight, what would you change? It’s not just where you would have spent less. Where would you have spent more? Would you have invested more in yourself? Perhaps a better suit or pair of shoes? That qualification which seemed expensive at the time, but which would now have you on a £20,000 higher salary?

Now abstract yourself from the present looking at the past, and put yourself in the future looking back at the present. What would the 60 year-old version of you say about your choices today?

Where would the ‘future you’ want you to spend or save the X now, versus having the 3X or 5X in the future? That question helps focus the mind on what actually matters now, and where you should therefore spend more today. It also reveals where cutting wastage will have a meaningful impact in the future.

Ignore the misers. Ignore the hedonists. Pick the balance which works for you. If you want to pull forward from the future, do it. But recognise you’re effectively borrowing from the future at a rate of 3:1 or 5:1 – because what you spend now won’t benefit from the magic of compounding. Remember the Lifestyle Line – it’s not a one-for-one trade-off. It’s a one-for-three or one-for-five.

You can’t get rid of these trade-offs. They exist. But you can control your plan and your life. So understand the Lifestyle Line’s trade-offs, make your choices, and then don’t feel guilty about spending too much or too little.

Life’s too short.