This archive report was first published on 22 August 2019.
Why Lifestyle Inflation Can Drain Your Savings ¶
Living in a bed sitter in a non-glamorous part of town, earning a modest income, and making ends meet may seem like a far cry from the life you lead today. Fast forward 10 years, and you're making several times the amount you used to, but it never seems to be enough. You've moved into a larger house in a posh neighborhood, bought a car you can barely afford to keep, frequent high-end restaurants and nightclubs, and have a gym membership you barely use. This is the dreaded lifestyle creep!
It's only natural that you'll want to improve your lifestyle as your income increases, and you should. However, it's also essential to keep an eye on your hard-earned money to prevent it from going down the drain of lifestyle inflation. Here are some strategies to help you curb the lifestyle creep:
1. Clarify Your Goals ¶
Before spending additional income frivolously, write down your long-term financial goals, such as saving up for your children's college education, buying a home, or going on a dream vacation. Even seemingly small extra expenses can add up quickly and keep you from reaching your goals as planned.
2. Avoid New Debt ¶
Racking up new debt because you have additional income will only take you a few steps backward. Whenever you get in debt, you're mortgaging your future. Don't be tempted to think that you can now afford to be in debt – there's no such thing as being able to afford debt. Factor in interest rates, and the picture gets even bleaker.
3. Track Your Expenses ¶
If you don't have a budget, lifestyle inflation might catch you unawares. A budget enables you to track your income and expenses, hence you'll be able to notice any drastic changes and adjust accordingly. When drawing up a budget, make sure to include emergency fund savings, annual or semi-annual expenses, and expenses for recreational activities.
4. Pay Yourself First ¶
Pay yourself a significant amount of the additional money, which means that the money will go straight into your financial advancement instead of being swallowed by lifestyle inflation. This is one of the most important principles in wealth creation.
5. Save 100% from Your Side Hustle ¶
Unlike in the past, more people are going for part-time jobs or hobbies for additional income. A lucrative side hustle can help you afford a better lifestyle, but you should be careful that the extra money doesn't go to unnecessary expenses. Try saving all the money from your side hustle and continue living on your main income.
6. Make Gradual Changes ¶
With more cash to spend, there's nothing wrong about improving your lifestyle. However, instead of making drastic and expensive lifestyle changes, focus on things that matter and will significantly improve your life without hurting your wallet. For instance, you can go for upholstery instead of new furniture, buy a few new wardrobe essentials, and have your car repaired and repainted.
7. Reward Yourself Wisely ¶
Do you want to give yourself a treat for your hard work? You definitely should! But instead of going on a shopping spree where you purchase anything that pulls your eye, think about what you really want. A good idea is to wait for 30 days before buying the object of your desire. If you still want it after this period, go for it.
8. Make the Right Friends ¶
Surround yourself with people who share your financial goals and values. If your friends are always suggesting expensive leisure activities, don't break your back – or the bank – trying to keep up with them. You can suggest less expensive options or even take a rain check. If they're real friends, they'll understand and support your goals.
