Starting to think in your adopted currency. Geoarbitrage lifestyle inflation.

When you first move to a foreign land, where your relatively strong currency has more purchasing power, you feel rich. I covered this in article on Geoarbitrage. This leads to an interesting condition: Geoarbitrage lifestyle inflation.

All of the sudden, instead of having 1,000 USD I have 5,000 BRL, and it feels like soooo much more! Actually, it is more, in terms of purchasing power. A $20USD lunch in the US does not cost $100BRL here. So, I can buy more lunches, for example.
Purchasing something is now a less-big deal.

And that’s a real big deal! And the subject of today’s post.

Danger of Instant “Wealth”

I think this is a phenomenon that is not unique. I believe anyone coming into more wealth suddenly can be hit with an overspending problem. The root cause is unchecked confidence, bordering on vanity. The cure is humility.

Think of a lottery winner. They instantly have more purchasing power than they did. They’re rich, relative to their social circle. They become over confident. They pick up the tab, they make risky investments, they give out loans, buy a larger home and car than they need.

This picture sums it up for me. The person with this condition is analogous to someone who thinks they look better than they do.

Before they know it the money is gone.

Mo Money Mo Problems

You may not be a lottery winner, but psychologically it very similar to a huge increase in purchasing power as a result of geoarbitrage. After moving countries, I had diagnosed myself with this unfortunate affliction.

If you become instantly rich by earning a powerfully currency but spending in a low cost of living area, you too may experience lifestyle inflation.

It can sometimes take the form of unwarranted generosity as you inflate the lifestyles of those around you. This can be tough to walk away from and it will wreak havoc on your finance goals!

It’s fun to go out to eat for every meal of the day! I like picking up the tab for my guests. I enjoy buying everything I want with no second thought.

I think some of this is good. When you’re in a position to help others less well off, maybe you should. Don’t get me wrong, they could also just be lazy, and you’re supporting an able-bodied lazy person. Or giving to a charity that overpays their executives. There’s lots of garbage people throw money at that does nothing towards the common good, or common sense. That’s a topic for another day.

But yeah, back to the story. I used to live a good but very middle-class life in the US. I could have lived a very good upper middle-class life but I didn’t; I put more effort towards saving in the last few years there, and I’m glad I did. Fancy dinners are not memorable for long. A fancy car is nice at first. Its good compliment-getter. But the luster fades and you’re just left with a big hole in your savings or a monthly payment eating away at your income.

Anyways, I was buying everything when I first got to Brazil. Using unnecessary services. I have a law firm calculate my monthly income taxes. They told me it was easy for me to do myself. They offered to prepare a step-by-step guide. But I used them. Every month. Every month it cost me over $100 USD, to basically have the equivalent of payroll taxes deducted form my check. That’s one of many examples of financial laziness due to income-overconfidence (I eventually began doing it myself).

The other factor

If you geoarbitrage your way to financial independence by moving to a new country to take advantage of greater purchasing power, you’ll be spending in a new currency that you’re not used to.

The money looks different. You may not associate the same emotions to this money. It may, at first, have a much different psychological impact when spending.

My point is, the money will feel less real. The emotional impact of spending will be softened. Be aware of that and be careful not to let it get ahead of you.

You may not be used to your new currency but don’t treat it like Monopoly money. Trust me, this is very real. This is the other factor I’ve identified that seems to make spending much easier in this type of situation. Everything costs less, and you don’t have the same emotional attachment to the physical currency.

Your new currency just as real as your home currency. You had to work hard to get it and now you need to spend wisely.

How am I fixing this psychological trap?

For me the process that got me to this realization was tracking my spending and income. Every month I track how much I made after taxes. I track how much I transfer from the US to Brazil. I track what that got me in BRL at the exchange rate available at that time.

I also track my purchases. I have various categories, like groceries, eating out, shopping, etc. I look at the figures from time to time. It was not very interesting for the first couple months. First of all, I wasn’t disciplined enough about tracking. The past two months I can say with certainty I have tracked all expenses and the data is good. Now that the data is reliable, I can compare it to my income, after taxes.

Ouch! It feet good to make a lot. It feet good to spend a lot. But guess what? When you put those two together it doesn’t feel good. It feels like being a hamster running on a wheel. Moving real fast but I’m not going anywhere.

I actually started tracking my spending to verify my budget, which I created based on the best-available internet data at the time. Turns out I’m not too far off, but my target budget was a bit low. Or my real spending is too high. I’m going with the latter.

Anyways I thought about it, the fun of blowing money has worn off a bit. I look back at the spending verses income and realize I could have made more progress.

Furthermore, the more spending one requires the longer it will take to get to financial independence, which I define as your assets generating enough income for you to live on without having to earn income.

So, if you are an aspiring geoarbitrage retiree, or aspiring digital nomad, or anyone wanting to go somewhere your money stretches further, heed this warning. You will feel a wealth effect. Don’t let it take you off your plan.

You’re not on vacation, so spend like a local, because you are.

-Sirsandals