Lifestyle inflation is real and the fact that you are making more money doesn’t necessarily mean that you are on the fast track to financial freedom. Lifestyle inflation simply refers to a noticeable increase in spending as a direct result of an increase in your earnings. Many people head out on a spending spree as soon as they get a windfall or raise at work because they feel entitled to the ‘better life’ after having struggled to make ends meet in the previous years.
Lifestyle inflation however creeps up on you slowly through an unspoken yearning to keep up with the Joneses. Once you start earning some more money, you want to discard your old clothes and buy some new trendy cloths for work, you want to trade in your old car for a shiny new model, and your house suddenly starts to look like a dumpster in the worst part of town.
However, a couple of months later you’ll discover that the increase in earnings hasn’t made much difference on your finances – you still worry about rent, bills, and unexpected emergency expenses. This piece provides insight into four ways you can protect your finances from lifestyle inflation.
Motivate yourself with short-term and long-term financial goals
A great way to protect your finances from lifestyle inflation is to set financial goals and start applying your money towards reaching those goals. Money seems to have a mind of its own; you’ll always find ways to spend money that you didn’t earmarked for specific purposes.
Creating short-term financial goals such as six months worth of living expenses in an emergency savings fund will protect you from ‘wasting’ money on junk expenses. You can also tie your extra earnings down in the literal sense of the word by stashing money away towards long-term goals such as saving towards a down payment, paying off your mortgage, or creating a college tuition fund for your kids.
Avoid impulse purchases by thinking things through
A large chunk of lifestyle inflation happens in the form of impulse purchases. You could just be surfing the web and an ad for an awesome vacation just floats through your screen with an incredible 30% off offer—but you’ll forget that you’ll need to buy travel insurance, pay someone to babysit, house sit, and pet sit, when you are gone. If you are into cars, you could start thinking about upping your street credibility by getting some new luxury ride that will keep heads turning, without thinking of the hidden expenses such as an increase in luxury auto insurance premiums and bigger maintenance costs.
Know the real effect of raises on your earnings
You can also protect your wealth by taking the time to calculate the real effect of raises on your earnings before you go out on spending sprees. If you boss offers you a $20,000 annual raise – it sounds very huge on paper – and no one would blame you for spending $5000 on whatever makes you happy. However, after you pay taxes on the $20,000 you’ll be left with about $14,000. When you divide $14,000 by 12 months, you’ll be left with about $1,166 each month. Take the division further to spread the money into a weekly stipend and you’ll be left with about $291 per week.
When you do the calculation, you’ll get a different perspective showing you that an extra $291 every week is not enough reason to whip out the checkbook and start blowing money.
You can’t spend the money you don’t have
You can ensure that the extra money that you earn from a raise has a tangible effect on your finances by automating the saving process to take the money out of your account. You can’t spend the money that you don’t have. Hence, if you want to apply the extra income towards increase the size of your investment portfolio, you can set up a standing order to deduct the extra payment and transfer it into your investment account automatically on payday.