Is Lifestyle Inflation Stealing Your Financial Future?

Hi Reader,

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Congratulations! You finally got a promotion at work, or you just landed a high-paying job that pays significantly more your previous salary! You take a deep breath and sigh a heave of relief!

You can now finally live a little, afford that beautiful apartment or that raw donor hair.

You can now start eating out more, upgrade your wardrobe and look the part, and buy that car.

However, be cautious of a silent thief lurking in the shadows: Lifestyle Creep.

Lifestyle creep occurs when your standard of living increases as your income rises, turning yesterday’s luxury into today’s necessities. It often happens unconsciously if we don’t pay attention and can keep one to living from pay-check to pay-check. The real issue is not the occasional splurge, it’s the normalization of splurging. These little upgrades in lifestyle can snowball and create an expensive way of living that you now feel obligated to maintain. This may affect savings and investment. Most times, people acquire liabilities disguised as assets after a pay rise whose maintenance expenses become large over time.

This phenomenon is why many gamblers go broke after receiving a windfall and why young adults can struggle financially after landing their first jobs. Enjoying a few more outings or splurging on a car can quickly spiral into a cycle of excessive spending, leaving little room for saving or investing for the future.

In a culture where we are constantly told that we deserve the best of everything (often by people trying to sell us luxuries), lifestyle creep can spiral out of control, leaving you feeling emptier than ever.

How to Avoid or Overcome Lifestyle Creep

• Create a budget that reflects your values. Assess where your money is going and ensure your spending categories are genuinely improving your well-being or creating lasting happiness. Cut or limit areas that don’t align with your values.

• Stick to your budget. Don’t abandon your budget just because your income has increased. Remember, budgets are for everyone, regardless of their earnings.

• Differentiate between wants and needs. Before making a purchase, consider if it’s a want or need. Prioritize needs and be selective with your wants.

• Save before you spend. Prioritize saving over spending and make it non-negotiable. Make saving a priority by automating your savings. If you can, increase your savings with each capital raise. Some advisors recommend allotting 50% of the increase in your pay to your savings for at least about 6 – 12 months. The increase can also be useful for building your emergency buffer or beefing up your retirement savings.

• Identify Spending Triggers. Recognize the things that prompts you to splurging when you receive extra money. Maybe it’s FOMO when others invite you to a luxe dinner. Then, you can figure out ways to politely decline or attend less frequently. It can also be scrolling through social media. Here, you can reduce scroll time, hide ads, or unfollow/hide certain people.

• Consider Renting Instead of Buying. Before making big purchases such as a boat or holiday home, evaluate how often you will use these items and the total costs of owning them – payment, maintenance, and upkeep. Depending on the situation, it might make economic sense to just rent the items whenever you want to enjoy the activity.

• Be an intentional spender. Be more mindful of how you spend your money. Do not operate on autopilot when spending. Don’t just make purchase because it’s within reach. This helps prevent buying items you don’t really want or need.

• Budget for fun! Now that you earn more and can afford to satisfy some of your wants, you want to do that consciously. Set a personal limit for your fun and stick with it.

If your previous income (before the raise) is sufficient for your needs, then you can pretend that the raise did not happen for a few months and direct the increase into savings or investments. Keeping the extra income separate from your regular account can help curb impulsive spending. Before you upgrade your lifestyle after a raise, make sure you upgrade your savings and investments accounts. Depending on your circumstances, it might make sense for you to upgrade your lifestyle a little to match your new job. This may not be lifestyle creep as long as these are necessary for you to get the job done.

While it’s natural to want to reward yourself after a hard-earned raise, remember that financial stability is a reward too. The next time you think ‘I deserve that brand new car’ after a pay rise, remember that you deserve to have a financially stable future without being stuck with a car with a high maintenance costs.

Feel free to send in your questions; you may be influencing the next newsletter!

Act Now:

• Plan financial goals and budget for years to come such that extra income can be channeled into that.

Reflect on This:

• The last time you received an unexpected money, what did you do with it?

Till next week, I am rooting for you, money-ly!

Dee

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Disclaimer: This does not constitute financial advice. Please conduct your research or consult your financial advisor for important financial advice.