What is Lifestyle Inflation All About?
Lifestyle inflation talks about the rise in spending when the income of an individual increase. It seems to get bigger every time an individual gets a raise and can make it hard to get out of debt, save for retirement or achieve other financial goals in the big picture.
It leads to people getting trapped in a cycle of living paycheck-to-paycheck wherein they are just left with money which is sufficient only to pay their bills on a monthly basis.
What Results in Lifestyle Inflation?
People tend to spend more if they have more. Another factor which contributes to lifestyle inflation is entitlement. Since you would have worked hard for your money, you feel justified to spend more and treat yourself to better things.
While this isn't always a bad thing, being too compensated for your hard work can now and in the future be detrimental to your financial health.
Also, people tend to spend more when their income increases since they think they'll be happier with the extra goods and services they can afford now. In fact, those purchases often do not make them happier.
How to Avoid Lifestyle Inflation?
By consciously updating spending as well as saving amounts, it is possible to avoid lifestyle inflation. Creating an automatic savings plan can be a good option to ensure saving goals are met and spending is cut. To avoid lifestyle inflation will translate to achieving financial independence when you are at a younger age, having the financial flexibility to opt for a dream job over a more paid option and early retirement.
The net effect of an increase is often less important than appears after taxes and expenses. Take the time to measure the actual change in your budget and decide how that extra money will affect you.
Another way to curb overspending is to save a small percentage of your increased wages as you make more money.