Lifestyle inflation is a part of our culture that seems to make sense on the surface: people tend to spend more if they have more. But this can start to spell financial disaster if we’re not careful.
It can be easy for people to feel as though they need to keep up with their friends’ and coworkers’ buying habits. After all, you work hard and you deserve to treat yourself to those upgrades and splurges you’ve had your eye on. Right?
While it’s not always a negative thing, rewarding yourself too much can damage your finances—now and in the future. Here are 10 ways to manage lifestyle inflation so you’re not spending money on things that don’t meet your future goals.
10 Ways to Manage Lifestyle Inflation
1. Be Aware of Lifestyle Inflation
Prepare yourself for how you’ll handle extra cash coming your way. If you escalate each of your regular expenses when your paycheck increases, for example, it’s as though you didn’t get a raise at all.
It’s not until you became conscious of lifestyle inflation that you’re able to curb your spending and seriously consider how to handle the extra cash.
It’s all-too-human to feel as though it’s time to uplevel your lifestyle when you earn a higher salary, so it’s best to be on the lookout for these impulses.
2. Don’t Count on Those Bonuses
A bonus feels like a great opportunity to spend some money on yourself. After all, you earned it through your own hard work!
Just don’t assume you’ll be able to earn the same bonus on a regular basis. Be sure to treat every raise, bonus, or stock dividend as a one-time windfall, and save as much as you can.
3. Calculate the Real Significance of a Raise
After factoring in taxes and expenses, a raise is often less significant than you first thought. It’s not always fun when you feel like celebrating, but it’s important to gain perspective by calculating the real change to your budget and determine how that extra money is going to realistically impact you.
Let’s say you’ve just gotten a $12,000 annual raise—that’s $1,000 more per month. Then subtract about $400 per month for taxes (although this will vary), and that raise now comes out to $600 per month. This is significant, but not quite enough to result in a huge lifestyle shift.
4. Embrace Experiences Instead of Things
When you start making more money, you should feel empowered to use some of it to improve your lifestyle. Then, instead of looking for a new car, house, or designer clothes, consider investing in experiences.
Go on a vacation, sign up for a class, or finally travel to visit a friend you’ve been meaning to see. You’ll create lasting memories that leave you fulfilled, rather than a short-lived feeling that needs to be replicated when, say, you buy a new wardrobe.
5. Spend Time With Friends With Similar Budgets
It pays (literally) to spend time with friends who have similar budgets to yours, rather than big spenders. When you want to be able to afford the same things as your friends, you might fall victim to lifestyle inflation and spend more than you mean to – especially when you’ve gotten a recent salary increase.
If your friends live an inflated lifestyle, you might be enticed to go to a pricier restaurant, order expensive drinks, for instance, or even pick up the whole tab. On the other hand, if your friends live more modestly and you match your behavior to theirs, you’re far less likely to overspend.
6. Transfer Extra Cash ASAP
Remember that if you’re satisfied with your current lifestyle, there’s no pressure to change it! And if you want to invest the extra funds coming in from a raise or a new job, get it out of your bank account right away.
If you don’t need the extra money to cover essentials, pause for a moment before you start spending. Consider setting up an account and transferring the excess so you don’t end up spending it unnecessarily.
7. Outline Your Goals
Without clear objectives for you and your family, getting a raise or promotion can put you on the fast track to lifestyle inflation, spending the extra money on things that don’t bring you closer to your goals.
When you get that increase, sit down with your spouse and talk about where you see yourself in the future—maybe as long as ten years down the line. Would you like to save for your child’s college education? Do you want to travel more? Pay off debt or buy a home?
It’s time to establish a game plan to pinpoint where that extra money really needs to go. You’re much less likely to get trapped in a cycle of lifestyle inflation if you stay focused on your goals and understand how that windfall can help you achieve them.
8. Avoid New Debt
When you get a raise, it’s easy to think you can now “afford” new debt. The truth is, when you get a raise it’s absolutely a step backwards to finance a new car, rack up your credit card balances, or go into major debt at all. This new debt will only spread your budget thinner, despite the fact that you’re earning more.
A better practice is to pay off any current debts, beginning with the smallest. When everything is paid off, open savings accounts for a car, home, or other larger purchases. When the time comes to buy, you’ll have stowed away a larger down payment and can likely get a lower interest rate.
9. Change Your Lifestyle Gradually
When you achieve success in your life, there’s absolutely nothing wrong with improving your lifestyle. But to avoid lifestyle inflation, the most successful people increase their spending little by little when it comes to things like homes, cars, clothing, and vacations.
Remember that when you increase your lifestyle, your long-term expenditures also escalate. That pricey car might require a more expensive mechanic, and your large new home will call for more upkeep. Especially in the weeks following your raise, celebrate reasonably and feel proud.
Then plan your next moves around incremental changes rather than huge, life-altering decisions.
10. Don’t Equate Success With Material Things
Our society is so rampant with built-in lifestyle inflation, it can be easy to forget that luxury goods aren’t limited to the wealthy. Just about anyone can qualify for the credit they need to purchase cars, homes, boats, and other items without actually being wealthy. It’s all too easy to be living alongside people in a completely different tax bracket, and desperately trying to stay financially in step with your new lifestyle.
At the end of the day, the true measures of success are health, love, friends, family, and experiences. New material things are no substitute. If you’re happy with your quality of life, you shouldn’t feel the need to prove it with lavish purchases, and yet it’s so very tempting.
And who knows? If you’re careful with your new financial windfall and avoid the pitfalls of lifestyle inflation, you just might be the envy of your neighbors when you’re easily able to retire, travel, and enjoy life instead of paying off debt far into the future.