5 Ways to Avoid Lifestyle Inflation

I’ve seen this happen a hundred times. Someone gets a pay raise or a new job with a higher salary, and all of the sudden, they are spending proportionately more than they did before.  This is known as lifestyle inflation, and it is detrimental to your path to financial independence.

What’s wrong with spending more now that you make more you ask?  Well first of all, for someone with debt, it makes it that much more difficult to get out of it.  Secondly, it impacts retirement goals.  And worse, it could make it challenging for someone to make ends meet.  One of the most common occurrence of lifestyle inflation is a brand new job, whether you are a student fresh out of college or if you received a promotion. All of the sudden, your wants become your needs.  That big fat pay cheque can now be used to buy the next iPhone or HD TV. Suddenly, whatever you already have is no longer enough.

Here are 5 ways to make sure you don’t fall into the lifestyle inflation trap:

  1. Make NO changes to your budget
    • You already have a budget, so stick to it.  It doesn’t matter if you are earning an extra $10 or $1000 on your pay cheque, DO NOT adjust your budget!  I know this isn’t easy but you have to focus on the bigger picture.  You want to be financial independent, which means making some sacrifices along the way.  As a personal example, several years ago I switch jobs, and I received a 50% bump to my compensation.  Rather than go out and have a spending spree, I actually cut down my absolute spending amount!  It takes discipline, but in the end it’ll be worth it.
  2. Surround yourself with like-minded people
    • I work in the financial industry and it is very easy to fall into the trap of keeping up with the Jones’. When I look around me, I see my colleagues with million dollar homes and fancy cars.  Every night, they go out to fancy restaurants and spend hundreds of dollars.  There is a lot of temptation.  How I work my way around this is by spending more time with those who share a similar mindset for financial independence.
  3. Stay away from new debt
    • Avoid getting a new car load or loading up on new credit card debt. Also, the house you have is perfectly fine, so do not get a bigger mortgage for a new house.  With your salary bump, you should be focusing on paying down debt if you have them.
  4. Increase your absolute dollar savings, AND your savings rate
    • If you made $50,000 last year and you saved 30% of that, it equates to $15,000 a year. This also means you had $35,000 of expenses.  Let’s say you receive a 25% pay bump and your salary is now $62,500.  If you keep your spending flat at $35,000, you are effectively saving $27,500, which is a 44% savings rate!  Another step closer to financial independence!
  5. Knowing is half the battle
    • If you are aware of lifestyle inflation and how it could negatively impact your path to financial independence, that’s half the battle. This knowledge allows you to be conscious of your spending and your savings, which is really the most important ingredient.

So now you know what lifestyle inflation is and ways to avoid falling into this trap.   Keep that savings rate up and work at your budget!

As usual, if you have any questions, Ask the Fellow!

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