Money & Finance,  Professional Development

3 Strategies to Avoid Lifestyle Inflation

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Jake is a smart guy and does his best to make good financial decisions. He’s a natural saver, has a great budget, invests consistently for retirement, and has a well-established emergency fund. While Jake doesn’t live high on the hill, he meets his needs and even has a little bit of extra fun money leftover each month. His goal is to increase his disposable income so that he can start traveling like he’s always dreamed. 

Jake has been hard at work vying for a promotion that comes with a big pay increase. Fortunately, his work pays off and he gets the big promotion. His take-home pay is now 150% of what it used to be.

Like all of us, Jake wants to treat himself as a reward for all of his hard work. He decides he needs to look the part now that he’s making more than he ever has. Jake buys some new designer clothes and upgrades his laptop. He also makes the decision to hire a housekeeper and landscaper because now he’s got enough wiggle room in his budget to afford it. After all, his goal in attaining the promotion was to be able to enjoy more of his time outside of work.

After a few months of earning this new salary, Jake finally gets around to planning his first big dream trip. After checking his bank account, he realizes that he doesn’t have nearly the extra money he had anticipated. 

This, my friends, is lifestyle inflation. Lifestyle inflation, sometimes referred to as lifestyle creep, is the tendency to increase your expenses as your income increases. It means you’re making more money, but you still have the exact same money problems you had when you made less money.

Why is lifestyle inflation dangerous?

It’s a natural tendency for many people that when their income goes up, their expenses follow suit. Jake –  who was a fastidious saver – finally felt he could afford some things he had been avoiding because of budgetary constraints. However, the problem is that Jake’s goal was to be able to travel the way he’d always dreamed. But because of the way he increased his expenses through clothes, technology, and recurring services, his new expenses ate into all the extra income that would have funded his travel budget. 

The 3 dangerous aspects of lifestyle creep

It’s insidious

Lifestyle inflation is insidious.  Particularly for those who have been strict budgeters, it can feel very freeing the moment you have extra income at your disposal. The problem is that that feeling of freedom can sneak its way into our decision-making habits without us being aware of it.

While you may not be breaking the bank with a big purchase like a new car, the effects of multiple small incremental spending changes can be just as detrimental. Just like a snowball rolling down a hill – none of the individual snowflakes it picks up are of much consequence. But by the time that snowball reaches the bottom of the hill, it’s become a snow boulder.

It gets in the way of your financial goals

Lifestyle inflation can get in the way of your financial goals. Success in managing money comes in following the Pareto Principle – it’s 80% behavior and 20% brains. Because lifestyle inflation is insidious, it can easily begin altering your behaviors and habits. Once those are changed, it’s easy to lose sight of what all of your hard work and dedication has been for. You may be tempted to spend money that should be allocated towards saving and investing or dismiss your budget altogether. Before you know it, those new habits have created long-lasting impacts on the ability for you to meet your financial goals. 

Think of it like cheating on a diet. People often say starting a diet is the hardest part. But how much worse is it to resume dieting after you’ve cheated on it for a day…or a week…or a month? We play a series of mental games about how we ought to get ourselves back on track. If you slip up for a meal, might as well make it a whole cheat day. Or, maybe you just had a bad Thursday –  might as well wait to resume your diet until Monday. Monday will be a good, fresh start to the week. Suddenly, a few months have gone by and it still hasn’t been quite the right time to start dieting again. And you have an extra 10 pounds to show for it.

It inhibits wealth building

Despite the fact that you’re making more money, you may not have any more wealth to show for it, thanks to lifestyle inflation. Mind you – wealth is not just money. It’s much more than that. Wealth is the freedom to be able to live your life the way that you want to. Just like in Jake’s situation, he wanted to be able to travel. Unfortunately, he got caught up in spending habits that infringed on that goal. The ability to travel was his definition of wealth. All of the extra expenses that Jake used to be just fine without, were now a barrier to living the life he wanted. 

Perspective matters

Before we get into the tactics of managing lifestyle inflation, it’s important to have the right perspective in place. It’s ok to spend more money sometimes. We all deserve to treat ourselves once in a while and reap the rewards of all the hard work we’ve done. The problem is that its pretty easy to spend more money on things you don’t really care about once you have extra income at your disposal. 

The key is to think about the things that actually matter to you – is it a better vacation? Being able to put your kids into more activities? Maybe you’d prefer to hire a landscaper so you can spend more time with your family. Whatever it is, take the time to really think through what’s important. Make sure it’s the important things that you spend your money on, not something frivolous just because you can.

3 strategies to manage lifestyle inflation 

1. Stick to a budget

First things first, stick to your budget. If you don’t have one, now is the perfect time to start. Just like with anything else in life, you can manage it if you measure it. Half of the battle with managing lifestyle inflation is knowing what you need to spend versus what you can spend. If you don’t already know what you need to spend, you’re already putting yourself at a disadvantage. 

Certain apps like Mint allow you to set specific budget goals and categories. Once you’ve got your limits set, the hard part is already done. You can even adjust the settings to send you an alert when you’re close to or over an established limit for the month. This will be particularly handy for anyone worried about the temptation to overspend.

2. Automate your retirement account deposits

Pay yourself first. You’ve heard this rule before, but it’s one of the first things people forget about when their income changes. Most of us want to be able to retire at or above the quality of life that our current income can provide. That’s not something you’ll be able to achieve unless you increase your retirement savings commensurate with your income.

This is exactly why financial advisors suggest you should be saving 15% of your annual pre-tax income for retirement. Percentages are variable, so as your income increases, your rate of saving will follow suit.  

If you have a 401(k) and retirement contributions are taken directly from your paycheck, those will likely be adjusted for you automatically with changes in your income. If you have an IRA, that’s something you’ll need to manage more actively.

Fortunately, there’s a number of good tools out there that can help. Many investment platforms, like M1 Finance and Betterment, offer settings that allow you to easily determine and automate your investments each month. You can even create settings to automatically deposit money into your investment account when your checking account goes above a specified dollar amount.

3. Acknowledge slip-ups

When you mess up, fess up. No one is perfect, but it’s important to be honest with yourself. Make sure you consciously acknowledge what happened when you spend more than you should have or bought something you wish you hadn’t.

Remember, personal finance is primarily behavior, and behaviors are built on habit. When you make a mistake, take the time to consider whether or not it may have been due to a specific trigger. Did you just get paid? Did you have a bad day and make an emotional purchase? Did window shopping cause an impulse buy? Connecting the dots between the action and its context can help you stop any bad habits from taking root. 

The bottom line

The real antidote to unnecessary lifestyle inflation is awareness. Treating yourself every now and then is not a bad thing. The trouble begins when you start splurging on things because you can, not because you actually care about those things. Prioritize what’s important to you, set goals, measure your progress, build good habits, and give yourself a little grace when you mess up. 

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