Lifestyle creep, lifestyle inflation, keeping up with the Jones’, blowing all your money – whatever you want to call it, it will ruin your finances if you don’t take control of it. A few months ago, I celebrated being with the company for a year. I decided to leave my previous employer for a number of reasons and believe it or not, money was not one of them. Luckily, I found my dream company that checked everything off of my ultimate list and the pay ain’t shabby either. However, when I accepted this position, I made the decision to not give into lifestyle inflation because I am on a mission to join the club and reach financial freedom way before I hit 65. So even though my salary increased, I still live off of what I was living off of before and just bank the difference.
What is Lifestyle Inflation
Lifestyle inflation happens when you increase your spending when your income goes up. It tends to continue each time someone gets a raise, making it perpetually difficult to get out of debt, save for retirement or meet other big-picture financial goals. Lifestyle inflation is what causes people to get stuck in the rat race of working just to pay the bills.
The simplest example of lifestyle inflation is when you go from being a college student to working at your first full-time job. When you are in college you can get by on very little and try to save on everything from rent to haircuts. However, once your first big paycheck arrives – you are living large! You no longer need to get your hair done once in a blue moon because now it is a necessity to get it done every two weeks.
Spending more may not prevent you from reaching your big financial goals but it will delay you from reaching them. Think about it. Have you ever heard someone say “OMG! I love living paycheck to paycheck!” or “I love the thrill of not knowing how I will survive the last week of every month”. I know I haven’t. People will naturally want to purchase better things as they progress in their career but upgrading everything in your life will slow your savings progress and will have you stuck in the rat race longer.
Why I try to avoid lifestyle inflation
When I graduated from University I didn’t know what lifestyle inflation was, but I fell for it. After three years of working, I had nothing to show for it. Just like many others, I increased my spending each time my income increased. I was making the minimum payments on my credit cards, paying $30 in interest every month and had no cash to fall back on. I couldn’t even scrape together $500 if I needed it.
I left that job and had no emergency savings, personal savings and couldn’t tell you where that money went. Now when it comes to my finances my main focus is to have financial security and freedom. At the end of the day, if I want to fly to Bangkok for a two-week vacay with the Hubs – I can. Or when I turn 55 and decide I want to retire early and enjoy the fruits of my labour – I can do that too.
How you can avoid lifestyle inflation
Pay yourself first
Paying yourself first simply means saving before you do anything else. I didn’t do this at my first job and I don’t regret it. I just took it as a lesson learned and moved on to better financial habits. After five years of working, I decided that as soon as I get paid I will save half of my pay toward my three savings goals – retirement, emergencies and down-payment for a house. At first, you think you will miss the money, but then it becomes a habit and after a while, you don’t even bat an eyelash.
By paying yourself first, you are securing your financial future and give yourself a limit on what you have to live off for the now. You don’t have to save half of your paycheck like me, you can pay yourself first by adding another 5% to your retirement each month. And increasing your additional contribution by 1% until you hit your magic number. Your 65-year-old self will thank you.
Another way to pay yourself first is to put aside a percentage of your pay towards an emergency fund. How many Bermudians can say that they have enough savings to cover six months of expenses if an emergency were to happen? Probably very few. If you are one of the people who have nothing saved for emergencies, you can start by aiming for $1,000 and work your way to a fully-funded account.
Make a realistic budget
When you decide to get serious about your finances having a realistic budget will make a big difference. Most of the items in your monthly spending tend to be the same. Cellphone, cable (if you haven’t cut the cord), internet, rent, etc. The only thing I have noticed that is really under my control is grocery spending and how much I give myself for personal spending.
You don’t want to budget $300 a month for groceries for two adults and then you both spend $15 a day on lunch and never eat the groceries you purchased. You’ll end up spending $900 a month on food and throwing away the groceries you didn’t eat. When you could have budgeted $500 a month and brown bagged it to work. Saving you $400 every month. That is $4,800 a year! Imagine what you could do with that money.
In order to have a realistic budget, you must think of it as a working document and continuously tweak it and make changes until it is exactly how you want it to be. You must also track your expenses to see where the money you budgeted went. I am constantly adding a new budget line because there are things I haven’t thought of. I also take 5 mins at the end of every day to track my spending to ensure I am getting the full picture of my expenses and spending.
Automate
Majority of the bills I pay are automatically charged to my credit card on the 15th of every month. This keeps me from missing a payment and they are all on a card that I don’t carry in my wallet. The sole purpose of this card is to pay bills. I have even automated all my savings. So every month it is the exact same amounts going to their respective accounts. (I love seeing the growth!)
Even if you don’t use credit cards, I encourage you to take the time to set up automated transfers. That way, the money goes where it needs to go before you can spend one cent of it. After a year of automating my monthly transfers, I have built up a three-month emergency fund, saved half of the amount I need for a down payment and put an additional 10% to my pension.
It is really that simple. People can avoid lifestyle inflation by building good financial habits and making a conscious effort with their spending. So remember to always pay yourself first because anything can happen, make sure your budget is realistic because you don’t want to end up over-spending and don’t forget to automate your bills and savings.