One of the most difficult things about seeing an increase in income, or paying off your debt, is avoiding the lifestyle inflation that comes with it. When your income has increased, or when your debt is paid off and you have more money on hand, it’s tempting to tie that money up in recurring expenses.
Lifestyle inflation is when your spending increases to “match” your new income. You might decide that you can afford a new car (and its payment) now that you have more money. Or you might decide that you can buy a lot of little knick-knacks without counting the cost. You might even decide to eat out at nice restaurants more often.
The problem with lifestyle inflation is that, instead of using your financial good fortune to improve your security, you use it to purchase more things, or engage in activities that take you away from your current principles. Lifestyle inflation quickly takes your focus from actually living better on multiple levels to materialism and living a lifestyle designed to impress others.
Avoid Lifestyle Inflation when Your Disposable Income Increases
If you see an increase in your disposable income — no matter the source of that increase — it’s a good idea to plan how you will prevent the lifestyle inflation from taking over. Here are 3 tips to help you avoid lifestyle inflation:
- Bank most of the increase: You can’t spend what you don’t see. Bank any increase in your disposable income. You don’t have to bank all of it, but a good rule of thumb is to bank at least 75% of it. So, if your debt pay off or a raise leaves with you $500 “extra” each month, put $375 of it toward emergency savings or your retirement. The remaining $125 is enough to enjoy a special treat, but much less likely to precipitate lifestyle inflation.
- Remember the difference between need and want: Another key is to get back to basics. Remind yourself of the difference between needs and wants. When you remember the difference, it’s easier to say no to buying things you don’t need. Drawing the line can help you avoid lifestyle inflation. It’s often too easy to get caught up with things when you think that you “need” what you used to view as luxuries before your new income level. Keep the differences straight, and you will be less likely to give in to lifestyle inflation.
- Consider experiences vs. things: Instead of focusing on things — which are a huge part of lifestyle inflation — focus on experiences. What do you enjoy? Do you want to retain the choice to enjoy those activities? If you like taking a walk in the crisp autumn air (one of my favorite activities), do you really need to buy a bunch of stuff to clutter up your house? If you enjoy travel, doesn’t stuff just hold you back? Think about what experiences you enjoy. Instead of buying things, consider putting some of the extra money you have in a fund to help you enjoy travel and other experiences. You can check out a certificate of deposit calculator to see how your funds can grow when invested wisely.
Really think about your lifestyle, and what’s important to you. While it’s nice to get a little income boost, you want to make sure that you aren’t inflating your lifestyle and losing site of what’s important. Put that money to a use other than things, and you can continue living a truly rich life while preparing for the future.
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