Posted on Tuesday 10 December 2019
Have you ever gotten a raise and immediately thought, “Perfect, I can afford that new car now!” Or left a tiny, studio apartment for a two-bedroom once you started getting bigger paycheques? Or maybe that bonus finally came in and your first inclination is to jump-start your plans to buy a home (even if you only have a couple of thousand dollars in your savings).
In a nutshell, that’s exactly what lifestyle inflation is—increasing the amount that you spend when your income increases. And that extra spending might not even be on the big things (like cars or houses), either! Most of the time, lifestyle inflation is simply part of a natural progression that happens when you make more money.
For example, with a bigger paycheque, you might find that your grocery list isn’t restricted to ramen noodles and peanut butter and jelly sandwiches anymore. You will probably start buying better food, or even get takeout a few nights a week. Or maybe you’re giving yourself a little more spending money while on vacation, or opting for a new $50 sweater instead of a $15 sweater from the secondhand store.
And even though the generic brands worked just fine before, you’ll probably start splurging on some name brands when shopping for toiletries and paper products (and who could blame you—everyone knows that once you get the name brand toilet paper, you can never go back).
The point is that when you are making more money, what used to feel like an extra expense suddenly isn’t quite so unattainable any more. But the problem with lifestyle inflation is that it tricks you into thinking you can manage an increase in long-term expenses. It’s a false sense of security that leads straight to living paycheque to paycheque. And regardless of how much cash you’re bringing in, you’ll feel the same negative effects on your ability to save and establish financial security for your future.
How can you avoid lifestyle inflation? What’s the best way to prioritize your spending habits so that you don’t fall into the trap of living paycheque to paycheque? If you’re worried about falling into the trap of lifestyle inflation, don’t panic: the first piece of safeguarding your financial health against lifestyle inflation is simply knowing that it exists and understanding how it happens.
The second—and most important—piece is learning how to prioritize your spending. In the sections below, we’ll give you the best tips to learn how to make smart spending decisions and avoid falling prey to lifestyle inflation.
If you’ve just gotten a raise of $1,000, that doesn’t mean that you go out and start spending an extra $1,000. If you do, you’ll find yourself falling back into debt before you can even sign your credit card receipt.
Think about it this way: even though you’re getting an extra $1,000 on paper, you still have to account for somewhere between $200 to $300 in taxes. And when you think about it, that remaining $700 isn’t really disposable income. If you want to get yourself out of that paycheque to paycheque cycle, you need to allocate money towards your financial future, like a retirement account or rainy day fund.
Don’t forget that there are plenty of hidden “costs” that may not be accounted for when your income increases. If you really want to make that raise or bonus work for you over the long term, you need to make sure you are putting away a good portion of your newfound income for your savings.
It sounds so simple—but not understanding the difference between needs vs. wants is one of the most common reasons that people find themselves trapped by lifestyle inflation. And knowing the difference between what you need and what you want can not only be a huge boon to your financial health, but it can also take a lot of stress off of your shoulders: spending based on wants instead of needs equals debt, which also equals anxiety and frustration.
But sometimes it’s hard to differentiate between the two. There’s a lot of overlap when it comes to wants vs. needs. For example, having a brand new phone, a huge house, and a flashy car are all examples of wants that could start as needs—because you still need a phone, somewhere to live, and some form of transportation. The difference is that you want to have the latest and greatest version.
And we all need water to survive—but you can easily turn that need into a want if you aren’t careful. A package of generic bottled water for $3 is just as useful as that $7 name brand. And while clothes are a non-negotiable, there’s a huge difference between buying a $40 department store dress and justifying a $400 designer dress.
Spending on impulse is called emotional spending, and it’s a slippery slope. Emotional spending can run the gamut from going on a shopping spree to get out of a rainy day funk, to rewarding yourself for a new promotion or a successful presentation with a new pair of shoes.
An impulse purchase now and then isn’t going to break the bank—but once you get into the habit of shopping to celebrate (or lift your spirits), it can be a hard rut to get out of.
If you know that you are prone to impulse purchases, there are a few ways that you can help yourself avoid emotional spending. First, unsubscribe from those promotional emails that your favorite stores are always sending you. (After all, it’s much easier to avoid splurging on an online sale if you don’t know when it’s happening.)
Second, start using the 24-hour rule. If you’re out shopping and see something that you absolutely love and want to buy right then and there, challenge yourself to wait before you make a decision. If you still really want it after 24 hours, extend your challenge to a few more days or even a week.
Waiting gives you time to think about your finances and see if you really do need (or want) an item. If you have any nagging thoughts in the back of your mind that say you can’t afford it, or that you shouldn’t be spending the money, chances are that you’ll start to feel better about getting past that impulse to spend.
If you’re careful about the way you are spending your money, you can still celebrate your success and reward yourself for your pay increase. After all, you deserve it! But just as you deserve to enjoy a little more out of life from your income, you also deserve to set yourself up for financial stability later on.
Instead of making large purchases that will push you further into debt (or cause you to struggle to make your monthly payments), choose to make gradual upgrades instead. For example, rather than getting a new SUV with four-wheel drive before the snow hits, use some of your raise for a new set of snow tires instead. And if you’ve landed a new job and want to update your wardrobe, do it gradually by buying one piece at a time—don’t try and spend your entire raise all at once.
Once you start earning more, you might find yourself surrounded by people who also spend more. Maybe your raise came with a promotion and a new group of co-workers, or maybe you finally feel like you can join in when your friends go out for dinner every weekend.
And you might be tempted to use your new income to finally sign your kids up for private piano lessons, enroll them into private school, or start hiring a professional landscaper to take care of your home, just like your neighbors. It’s called keeping up with the Joneses, and it’s a losing battle from the start!
Don’t let the way that other people spend their money influence how you spend yours. Everyone has their own unique financial situation, and what works for someone else simply may not apply to you. When you see one of your friends on social media posting glamorous pictures of their tropical vacation, that’s not your cue to take one of your own. Resist the urge and do what is right for your own personal financial health.
Finally, don’t forget the cardinal rule of managing your money wisely—create a budget and stick to it. Even millionaires use budgets to make sure that they aren’t spending more than they earn and are making smart purchases (after all, that’s how they can manage to stay millionaires over the long term).
There are plenty of great ways to budget. If you want to have 24/7 access to your financial health, you might want to try downloading a budgeting app. These apps will connect to your bank accounts to give you real-time updates on your spending, using categories like Groceries, Entertainment, Clothing, and more. It’s a great way to get a holistic view of your finances—and all with minimal effort on your part. Sit back and let the app do all the calculating for you!
If you prefer a more hands-on approach, you can try using the 50/20/30 rule. You’ll have to split up every paycheque into percentages (and stick to it) in order for this one to work. Put 50 percent of your paycheque towards the necessities, like housing, groceries, water, and utilities. Put 20 percent towards saving and paying off debts, and let the remaining 30 percent go towards entertainment, dining out, and trips.
Budgeting is the best way to ensure that you stay on top of your spending habits and know exactly how much money is coming in, how much money is being spent, and exactly how you are spending it.
Everyone falls victim to lifestyle inflation from time to time. Once we start making more money, it’s easy to start spending a little more on expensive things or larger purchases. The best way to safeguard your financial health against lifestyle inflation is to understand how and why it happens. You’ll be much better equipped to identify the warning signs and stop yourself from falling back into the trap of living paycheque to paycheque. Trust us—your future self (and your bank account) will be much better off as a result!