A common misconception many people hold is that a higher income will solve all their financial problems. I found myself sharing this belief earlier in life. Living on a modest income, I longed for higher earnings, convinced it would bring about greater contentivity. Eagerly anticipating the freedom a sizeable income would bring, I believed it would render everything else accessible.
When my income indeed rose, I did manage to attain a certain level of financial security. However, my worries concerning finances seemed to persist, as funds remained scant. This prompted me to not only focus on my earnings but also analyze my expenditure. Here, I stumbled upon the concept of ‘lifestyle inflation’, which I realized was a significant roadblock to my financial success.
‘Lifestyle inflation’ refers to increased spending corresponding to an increase in income. In simpler terms, this could mean indulging in luxuries beyond our needs, purely because of higher earnings. Such indulgence could manifest as purchasing a fancy car following a lucrative job offer or a raise. Lifestyle inflation can jeopardize other financial objectives and hence, counteracting it is critical.
Thankfully, there are several strategies to manage lifestyle inflation:
1. MONITORING EXPENDITURE: Begin by acknowledging the existence of lifestyle inflation in your life. Ensure to keep track of all your expenses to get a clear idea of how your money gets spent. Access your bank statements or use online tools like Personal Capital or Mint for this purpose. Comparing your expenditure patterns with previous years can help identify unnecessary inflation and curb it.
2. PRIORITIZE SAVINGS AND DEBT REPAYMENT: To evade lifestyle inflation and achieve crucial financial targets, it’s essential to channel your income towards achieving your priority financial goals. Automate transfers from your checking account to savings the moment you’re paid. Make a habit of clearing your debts in the early part of the month, and avoid splurging on non-essential expenses. This will discourage overspending on luxuries.
3. INDULGING IN ‘AFFORDABLE LUXURIES’: Entertaining yourself occasionally is absolutely justified. However, it is crucial not to compromise your future financial stability while doing so. If you find your spending increasing with income growth, it’s time to reconsider. Instead, identify cost-effective alternatives to enjoy what you love.
4. RETAIN YOUR LIFESTYLE DESPITE RAISES: A sound approach to avoid lifestyle inflation is to persist with your current lifestyle, irrespective of income increases. If an annual pay raise is customary in your job, try maintaining your lifestyle as it was before the raise and save the excess earnings. Even if you manage to earn surplus money, dedicate all of it towards debt repayment or specific financial targets. Act as if the additional money does not contribute to your overall income. This approach can work wonders if you’re content with your current lifestyle and have clear goals.
In my case, I managed to repay debts swiftly by maintaining a frugal lifestyle. Although I could have upgraded many aspects of my life with the additional money, I found it best to continue with my existing way of living. Ultimately, excessive material possessions did not promise long-term happiness.
In conclusion, if you observe an alarming increase in spending due to higher income, remember these four steps to get back on track. Lifestyle inflation might be elusive, but it’s never impossible to tackle. Have you ever battled lifestyle inflation?
