As most of us progress through our careers (or business), our paychecks increase and as a result our lifestyle slowly (sometimes unknowingly) increases to match. Bigger houses, newer cars, fancy restaurants, and new travel destinations are just a few of the common choices due to having more money.
This is commonly called lifestyle inflation, basically as our income increases, as does our expenses. It could be a result on comparing to your peers, your parents, or even the feeling of self entitlement. Whatever the reason, it can happen to even the most frugal of us.
Mind you, there is nothing wrong with spending money that you have saved for a particular purpose, the problem arises when the increased lifestyle results in spending more than you have (see lottery winners), or spending when it gets in the way of your financial goals.
Lifestyle inflation has even crept up a bit on our family over the years, but we always make it a priority to have a high savings rate. So even though we have recently built a relatively expensive home (to me), we still manage to save a high percentage of our income as it is one of our financial goals.
How to Avoid or Control Lifestyle Inflation
- Save a Percentage of Your Income – Instead of setting a dollar amount of savings per month as your savings goal, use a percentage of your income instead. That way, as your income increases, so does your savings.
- Bank Your Raises – The idea of banking your raises has been mentioned before and is one strategy that can get you ahead financially in a hurry. The strategy is exactly as it sounds. Instead of buying more things with your increased income, why not bank it towards your financial goals?
- Set Your Priorities – What are your financial priorities? Is it to save for a down payment on a house? Build your retirement portfolio? Or simply build a passive income stream? Set your financial priority and stick with it!
- Have Fun with Your Money – Even though I’m pretty disciplined with my money, we know that there needs to be a balance between saving and spending. What’s the right answer? For us, we go skimpy on things that don’t bring long term joy and spend a bit more on things that do.
Altogether, it’s ok to buy nice things as long as you can afford it and it provides long term value for you. However, if you can keep lifestyle inflation in check, you’ll most likely be the one to reach financial freedom first.
So back to you, has lifestyle inflation crept up on you?