How to Fight Lifestyle Inflation

Justin da Rosa
by Justin da Rosa August 9, 2018 / No Comments

It’s an easy trap to fall into. After toiling away in an entry-level job, you start making a little more money and decide the treat yourself. The problem, though, is that “treating” yourself soon becomes the norm and, before you know it, you’re at a point, financially, where you feel like you never even received that well-deserved pay-raise.

Does this sound like you? Well, you’re not alone.

What you’re suffering from is called lifestyle inflation – and it affects the best of us.

Lifestyle inflation: What is it?

Simply put, it’s the habit of increasing our spending when our income increases. Many of us tend to increase our spending in lockstep with each new promotion, raise, or job change; it’s enticing to want to spend more money on ourselves as a reward for accomplishing career goals.

The problem, though, is that if you don’t keep a close eye on your finances – and rebalance your budget with each new pay increase – you may have trouble paying down debt or increasing your savings.

So, in the end, many barely even notice the strides they’ve made in increasing their income. And they fall into the trap of living paycheque to paycheque, left wondering where the extra money went.

How it works

For many, a pay increase is viewed as a way to improve one’s living situation. While this is true, they often focus on the wrong aspects and, as a result, increase their spending instead of saving.

This can come in many forms.

Some may be enticed to spend more money on shopping sprees or nights out. Others will add to their fixed expenses by purchasing a pricier car or more expensive home.

And while it’s nice to reward ourselves for our hard work, it’s easy to allow our lifestyles to grow along with our wages in such a way that negatively impacts our money habits, including our saving and debt repayment plans.

How to avoid lifestyle inflation

Like most money-related issues, it all comes down to developing — and dedicating ourselves to — good money habits.

Stop thinking about what bigger and better things you can afford following a raise and think about how much more you can save/pay toward debt.

This kind of thinking can be reinforced on an ongoing basis. For example, whenever you receive a bonus at work, contribute it toward paying down debt. Or, whenever you receive a cheque for freelance work, put it toward your savings goals.

If you start thinking about extra income as extra savings, you will be actively fighting (and winning against) lifestyle inflation.

So, when you receive an income boost, re-calculate your monthly earnings (after tax). Once you have a sense of how much extra income you will to pocket each month, you can revisit your budget and allot the extra cash accordingly.

For example: Say, prior to the pay raise, you dedicated $500 per month to savings, $1,500 to fixed expenses (rent, utilities, etc.) $100 to debt repayment, and $700 to spending money.

Now, assume you were given an after-tax raise of $400 per month.

You can recalculate your budget in such a way as to avoid lifestyle inflation by dedicating that extra cash accordingly. For example: You can increase your savings goal to $700 per month, increase your debt repayment to $200, and – to enjoy your spoils – increase your spending allotment to $800 (your fixed expenses would stay the same, as long as you don’t do something like buy a new car).

Another strategy you can use is to dedicate some of that extra income to a specific money goal; such as travel or saving money for a down payment on a home.

Bottom line

With anything money-related, it’s best to have a plan. And any time your financial situation changes is a great time to revisit your plan and adjust accordingly. Think of it as a journey and enjoy the ride – that way you’ll ensure you’re making the best financial decisions for your present and your future.

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Photo by Johnson Wang on Unsplash