The road to reaching your financial goals can sometimes be very difficult and tedious. We tend to hold back from buying certain things, and sometimes, we live on a tight budget in order to make ends meet. But all this seemingly comes to an end when all your hard work pays off and you get a raise, and finally, you can treat yourself to something nice. However, getting a raise can lead you to one of the biggest challenges to reaching your financial goals — and half the time, you don’t even notice it.
Have you ever heard of lifestyle inflation?
Simply put, lifestyle inflation is when your spending increases as your income increases. This can include moving to a more expensive apartment, getting a new lease on a car, or making small, repeat purchases that add up over time. All these can make it hard to break out of living from paycheck-to-paycheck even when your paycheck gets a little bigger.
It’s easy to fall into this trap. After all, what’s the point of working so hard to get a raise if you don’t treat yourself?
While there’s nothing wrong with splurging a little, the cause of lifestyle inflation goes much deeper than simply wanting to treat yourself. An article by Marcus on why ‘Rising Income Levels May Lead to Lifestyle Inflation’, found that young professionals use material markers to express who they are, in order to demonstrate that their career or chosen path is rewarding. In other words, lifestyle inflation is generally caused by the desire to prove your position in life — manifesting itself through material items, the house you live in, or the places you go to. And although doing this can feel good in the short-term, lifestyle inflation poses a problem in the long run, as Trent Hamm of The Simple Dollar explains that lifestyle inflation hinders you from reaching your financial goals. Allocating most, if not all, of your new raise to your spending budget means that you’re not saving or investing any of it for later on — marking a roadblock to your journey towards debt freedom and financial wellness.
If you recognize yourself in these examples, fret not. Here are a few ways you can break the cycle:
Set goals for yourself. Our resident writer Ash Cash stresses in ‘Saving 101’ the importance of setting financial goals in order to save better. Having goals allows you to constantly remind yourself what you need to save for, and why, especially if it’s something you want badly. That way, you won’t be as tempted to stray away from your plan!
Cut out what you don’t need. You’d
be surprised at the number of things or activities that you spend on, but can
easily cut out of your expenditures. Of course, we don’t recommend doing this
all at once. Start small and cancel subscriptions you don’t use anymore, or
start eating out just once a week. Make small, manageable moves, and soon
you’ll find yourself celebrating the joys of meeting your goals and saving
more.
Track
your expenses. After receiving
a raise, the Balance cite
that the best way to identify lifestyle inflation behaviors is to track your
spending — even for just a short time. Once you
recognize these behaviors, you can start cutting out purchases you don’t need.
Keep
a “splurge” budget. Not
buying or doing things you want will make you miserable, but overspending won’t
be good for you in the long run, either. That’s why it’s a good idea to create
a splurge budget for a week or month, and to stick to it. Purchases you don’t
“need” come out of that budget, such as buying a new video game, ordering
something online, or getting a coffee at a café even if you have a coffee maker
at home. If you want something pricier than your budget for the week or the
month, try to “save” that budget and let it roll over the next month so you can
purchase the item. This way, a splurge budget lets you treat yourself, but also
keeps you in check.
Article written by Anna Levy
Exclusively for paradigmmoney.com
The post Cutting Off the Joneses: The Art of Managing Lifestyle Inflation appeared first on P A R A D I G M . M O N E Y .