If you are ever at a point in your life that you have a lot more money than usual, you may be tempted to spend more money on yourself. Having more money to spend can be the result of either 1) reducing your expenses or 2) a significantly higher salary or income. The temptation to spend more money in events like these is often known as lifestyle inflation.
While most people will not experience a significant change in their cash flow within a short period of time (income – expenses), when you consider that some people pay off their mortgage early or get a new job, it isn’t that rare of an occurrence to see a drastic change. It is only natural to feel like you can spend more money on yourself in times like these. Yet, effectively resisting this urge to splurge on yourself can mean the difference between financial freedom and financial disaster.
How Lifestyle Inflation Works
As I mentioned, increasing your cash flow often happens gradually and as a result of increases in income. When you think of the annual raises, this only makes sense. As you earn more money each year, it is easy to compare it to what you were making just a few months prior. The increase in salary often results from your performance or experience on the job.
If you stop and think about it, what would be the natural reaction to this increase? Most likely it is a sense of accomplishment or pride. You have just earned more money for your hard work over the year. Unfortunately in this society of consumerism, the next step is often to buy yourself something – to reward yourself for all of the hard work that you have put in. The sense of entitlement (the idea that it’s your hard earned money and you deserve it) often leads to financial ruin.
Why Lifestyle Inflation Can be Disastrous
Without even knowing it, the small changes over time can lead to financial disaster. If you start spending a little more each week, before you know it, your expenses have significantly increased from what they used to be. Instead of being satisfied with a life of simplicity, it is easy to find yourself “needing” the many luxuries of life, like a new car, flying first-class, etc. If you are not careful and before you know it, your expenses can far exceed your income. To make matters worse, the things that once were luxuries now seem like necessities and are that much more difficult to give up.
Avoiding Lifestyle Inflation
Avoiding lifestyle inflation from the beginning is much easier than trying to change after the fact. Instead of giving in to the idea of entitlement, start asking yourself what you should do with extra money before you get it. By asking this simple question, you are not letting the gradual change sneak up on you. It keeps you engaged in your finances.
If you find yourself treating yourself to more and more things as time goes by, you may even consider writing down financial goals that will keep you active in your saving. Saving money towards specific goals keeps the money from just sitting in your bank account and tempting you to waste it away.
While it may not be easy to avoid lifestyle inflation, you can achieve it if you stay disciplined. Being conscious of this temptation is half of the battle – the other half is following through and putting your money towards good use.
How do you avoid lifestyle inflation?
This post was written by Corey, a staff writer from 20’s Finances and Passive Income to Retire. He writes about his financial goals, like retiring by the age of 27, to motivate others to be responsible with their finances.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.