We’ve all been there. Payday rolls around, and you couldn’t be happier. You hit your online banking app and smile at your new balance before paying your bills.
A trip to the grocery store, a night out with friends and a cruise around online stores for some new shoes, and suddenly it hits you: That money is gone, and you’re right back where you started. Lifestyle Inflation is coming into play here.
In simple terms, lifestyle inflation is when your spending increases as your income rises. Think of it as a new set of shelves: You installed the shelves to hold your books, but now you realize you have room for even more books. After a few months happily hitting the bookstore, your shelves are packed to the point of overflowing, and you’re back to needing more shelves.
In this analogy, the shelf is your income and the books are all the things you buy. It’s pretty easy to see how this happens. For example, if you’re a lawyer making a great salary, you have money to spend on nice suits and a better car. So then you get a raise and upgrade your house to one in a fancy neighbourhood. When you look around, you realize people there don’t drive Honda Civics, so you trade in your sensible car for a BMW. For every raise you get, you keep upgrading your lifestyle — even though doing so doesn’t actually make you happier than you were before.
Avoiding Lifestyle Inflation
To get off the lifestyle inflation treadmill, you may have to do some mental reprogramming to break some old habits. Try these ideas to get started:
Set Up a Budget: The first step to avoiding lifestyle inflation is to know exactly how much income you have and to track where every penny of your spending is going.
Pay Yourself First: The best way to keep yourself from spending is to hide your money from yourself. When you get a raise, set up an automatic savings plan that puts the extra money directly into your retirement account. When you don’t see the money in your account, you won’t be able to spend it.
Skip the Upgrades: Instead of buying a new car on a “schedule” or trading up for a bigger house just because you can, try staying put with what you already have. A good rule of thumb is never to buy something new if the old one is still intact and functioning. This habit will keep you from mindlessly inflating your lifestyle with things you don’t really need.
#FinancialPlanningMonday
Benjamin Aduroja
Financial Advisor
