Do you suffer from lifestyle inflation?

You’ve just got that promotion you’ve been working so hard towards. Woohoo – the day have finally come. So, you go out for drinks with your work mates and then take your girlfriend out for a fancy dinner to celebrate.

Do you seem to spend a little bit more these days, since the pay rise? How about buying a coffee each day, rather than the one you used to treat yourself to on a Friday morning.

What is lifestyle inflation?

Have you ever unlocked your bank account app to realise that you’re just as tight for money at the end of the month as you were before your pay rise? Have you been working so hard to finally be earning more money to only be in the same position as before?

This could be the work of lifestyle inflation. So, what is it? Lifestyle inflation is the act of spending more when you start earning more.

How do you fall into this pattern?

The scary part is, you could be falling into this pattern of spending more without even noticing.

It could be larger luxury items that you think come with the pay rise, where keeping up your appearances could mean spending more money on cars and holidays – exactly the same as those around them.

However, there are smaller items that can significantly increase your cost of living. These could be going out for food often (and not just fast food – but those fancy fine dining restaurants), going to cocktail bars (where they seem to charge twice as much for a drink with a funky name) and taking an Uber home rather than catching public transport (which you do every single other day, so why are you really catching the Uber?).

However, it’s important to remember that it doesn’t matter how much you earn – it’s what you do with the money you have. Just because you’re earning more money, doesn’t mean you’re wealthier if you’re spending it recklessly.

How to beat lifestyle inflation

But let’s not be all doom and gloom. There are ways to avoid and beat lifestyle inflation to put your new, higher income to better use and build your wealth.

  1. Don’t take on new debt – just because

Now that you’re earning more money, doesn’t mean you need to instantly upgrade your car, a new mobile phone and any other luxury items that really don’t need replacing (I’m getting flash back to that luxury bag that sits in my closet…).

If these new expenses come with loans (thank goodness my bag didn’t), you need to consider more than just the initial deposit and the fact you’re earning more.

Think of the length of the loan and really, more importantly, step back and consider whether the purchase itself is unnecessary.

  1. Live the same as you were before

What needs to change once you receive a higher income? Were you still living fairly well before the pay rise? Did you still get to go out and have fun every now and then? Then why does anything need to change?

If you were still able to pay off the car loan, rent, mortgage repayments and other lifestyle costs – continue living as if you were still on the lower income. Anything else that you now pocket each pay packet, chuck that into savings or create an emergency savings fund.

  1. Keep it on track

If you’re finding that you’re not too sure where your money is actually going – it’s time to find out. Have a look at bank statements and just be aware of when you’re spending.

Do you know that your weekly routines mean you’re buying lunches and dinners out most nights? Are you buying a coffee every morning? Do you feel like you need to get your nails done every fortnight?

Whether you create a budget, or just become aware of your spending habits, and start setting yourself some limits.

  1. Be your own person

Don’t feel like you need to change your lifestyle just because those around you are spending their money a certain way. Just because you have a bit more money coming in, doesn’t mean it has to go back out in the same ways as others.

Choose to be wise about how you spend your money and make it work harder for you in the longer run.

Every dollar you save can help you build an investment portfolio that will grow and compound over time. Building wealth like this can help fund the lifestyle you want for much longer than just one year. Your local Mortgage Choice financial adviser can you help navigate this with you.

Help me work out... Calculators

Posted in: Lifestyle