Lifestyle inflation can be a big hurdle on the way to achieving financial goals. Maybe you want to save for retirement and other things, but you’re focused on spending on luxury goods, eating out often, and taking vacations to unwind from work.
In this article, we will cover what is lifestyle inflation and how it impacts your net worth over time
What is lifestyle inflation?
Lifestyle inflation is spending more money as your income rises.
Lifestyle inflation is an almost inevitable part of getting a raise. And it can become an even bigger problem if you get a big promotion or find a higher paying job (when you are likely to earn more than ever before).
When you make $40,000 a year, your lifestyle usually dictates that you buy a modest house or apartment and drive around in an affordable car. However, if you make $100,000 a year and still live in the same home or drive the same car, you could be missing out on one of the big perks of making more money — living better
The problem with lifestyle inflation is that it can lead to an endless cycle where people continually need to work harder to earn more money just to maintain their current standard of living. If you’re constantly in pursuit of higher pay but not happier living standards, then it’s time to take a closer look at what’s going on here and figure out why it matters so much
While it’s tempting to treat yourself with a little more cash flow, it’s important to think about how lifestyle inflation will affect your future financial goals.
How does lifestyle inflation affect your net worth?
As we mentioned earlier lifestyle inflation is the increase in expenses when you earn more money. For example, if you earn a raise or a promotion, you may start spending more to match your new income by buying nicer clothes, eating out, and getting a better car.
As you earn more money and spend it on new luxuries, your fixed expenses stay the same. And if your income goes down at any point, you’ll be left with fixed expenses that you can’t afford on your new income.
The problem with lifestyle inflation is that it becomes difficult to change your habits. For example, if you used to buy generic cereal and now only buy the more expensive cereal, it may be difficult to go back once your income falls.
As you earn more money and spend it on new luxuries, your fixed expenses stay the same. And if your income goes down at any point, you’ll be left with fixed expenses that you can’t afford on your new income.
Lifestyle inflation is very difficult to avoid because it seems reasonable to spend money on things that make life easier or better. But if you want to build wealth over the long-term, it’s important to recognize when lifestyle inflation is happening and know how it can affect your future net worth.
How to keep your lifestyle in check and grow your net worth?
It’s easy to fall into lifestyle inflation and lifestyle creep. And it’s hard to get out of it. If you have a high income and spend on whatever you want, chances are that your spending will increase along with your salary. But there are ways around it.
Start tracking your spending and set a budget.
Tracking your spending is the first step to controlling your expenses. You will be surprised how much you spend on things you don’t need. I suggest using a simple Google spreadsheet for starters. It has worked for me for years, until I realized that I need something more robust that helps me manage my money automatically.
Now, once you know where all your money goes, see where you can cut expenses or make lifestyle changes that will help you save money without hurting your lifestyle too much. Set a budget for each category of spending (food, entertainment, clothing etc.). The goal is not to cut expenses as much as possible but rather to find the best balance between living well and saving enough money so that you can achieve financial freedom faster.
As you continue tracking your expenses and fine-tune your budget over time, you’ll soon realize where you can find extra money to invest or save.
Conclusion
Conclusion
Lifestyle inflation is a real challenge for many people; however, it can be avoided altogether with some self-discipline and the right tools in place.
Make a firm commitment to yourself that your lifestyle will never be more expensive than your income, and keep a close eye on how much money you send off in interest payments each month.
In general, lifestyle inflation is the careless spending of money that has been earmarked for either short or long-term goals. It’s easy to keep yourself in check by asking yourself a few questions before you make a purchase.