You may have found yourself in a situation where you have increased your spending just because your income has increased. Your spending increase to ensure you have kept pace with the rising income. Lifestyle inflation is when you allow your spending to increase gradually as you desire a more luxurious lifestyle.
Unfortunately, lifestyle inflation can easily sneak up on you if you let it. It might start with a simple lifestyle upgrade like the convenience of a takeout meal or the luxury of a brand-new car. But it could quickly spiral into an expensive lifestyle that you can barely afford.
Lifestyle inflation stagnate savings and investment making it difficult to achieve your financial goals.
How to avoid lifestyle inflation
1. Be aware of your spending choices
The first step is understanding that lifestyle inflation is a real threat. Unfortunately, it is very easy for lifestyle inflation to sneak up on you because it often starts with small choices. With time, small spending choices can add up to a very expensive lifestyle.
As you make decisions surrounding your budget, consider the threat of lifestyle inflation. When you are thinking about adding a new expense to your life, think about the reasons behind the expense.
2. Plan for your rise
Before you decide to upgrade your lifestyle, take a closer look at your raise. Sometimes a modest raise might not give a dramatic boost to the cash you have available to spend.
Take a minute to calculate the increase in your take-home pay with the raise. Some quick math will reveal exactly how much extra income you’ll be working with.
3. Add big changes to your budget gradually
When you finally get a raise, it can be tempting to upgrade several areas of your life at once. This is especially true if you’ve been waiting on this raise for a while.
But it is a good idea to avoid jumping into several new lifestyle expenses at once. Instead, add in new expenses one at a time to test things out.
If something truly improves your happiness or quality of life, then keep it up. If you find that a new expense doesn’t elevate your happiness, then slash it.
4. Find friends with the same goals
The best way to combat this is to find friends that don’t make you feel like you have to spend more just to keep up. Of course, you shouldn’t cut out people you care about over their spending habits. But consider having a frank conversation about your financial goals and why they won’t see you stretching your budget to ‘keep up’.
5. Set up automatic savings
The easiest way to save is to automate it. With that, you won’t have to make the decision to save on a regular basis. Instead, you just have to make the decision to save once and the power of automation will take care of the rest.
Once you have the take-home amount of your raise calculated, consider your savings goals. If you want to make progress easily, then have your intended savings transferred directly into a separate account. Then you can spend the extra that is left in your account without having to consider your savings goals.
6. Don’t take out any debt
If you find yourself taking out debt to afford a new luxury, then you’ve likely taken your spending too far. Although you might be able to afford the monthly payments, that doesn’t mean that you can truly afford something. Consider this carefully before taking on new debt.
7. Set up a budget
A budget can help you monitor your spending and help you stay on track. If you want to avoid lifestyle inflation, implementing a budget is the most effective option.
Through tracking your expenses and sticking to a budget, you are less likely to allow your spending to get off track.
The bottom line
Lifestyle inflation can easily derail your long-term goals. The trap of short-term gratification in the form of luxury convenience can delay your plans to get out of debt, save for a down payment, or retire.
When you are adding new luxuries to your life, weigh the benefits against your long-term goals. In most cases, you’ll choose to pass up the convenience of a new lifestyle upgrade in favor of your long-term financial stability.