Ever look back at your teenage years and wonder how you managed to cope with so much less money per month? Well, the reality is you’ve allowed your expenses to increase within that time. Granted, some are understandable as you take on more responsibilities such as living and food costs.
Lifestyle inflation is the practice of increasing your spending as you begin to earn more money. The main culprit is when we get a pay rise and instantly start planning how we’re going to spend this additional money, and it’s usually in liabilities such as a new car or home.
Now it’s perfectly acceptable to increase your spending as your salary progresses because you still want to enjoy life but there are several ways to avoid lifestyle inflation. The problem with lifestyle inflation is that it can often creep up on you without you realising and usually won’t be extravagant purchases but can begin with small items such as a fancy coffee each day.
Outline your Long Term Goals
Now before you even think about spending another penny you need to sit down and define your overall financial goals. This could be anything but you to have a goal or direction to aim for otherwise your spending habits won’t change.
For example, you could have a medium-term target of saving a house deposit within 5 years. This gives you a clear goal of what you’re trying to achieve. Ideally, you should choose a goal that requires you to keep a tab on how much you’re spending otherwise lifestyle inflation will continue to affect you.
As you can see, once I set out clearly defined goals to save a house deposit it became considerably easier to stay focused. It also allows you to understand what your priorities are, making it easier to cut back spending in unnecessary areas.
It also doesn’t feel like the same kind of sacrifice when you’re cutting back spending for a good cause. Your goals also need to be realistic so don’t suddenly say you want to save a million pounds in a month if there’s no real way to achieve this.
It’s all about creating an intentional game plan that you can execute to reach your goals.
Attack Debts First
One of the largest wealth killers is unsecured debt which is most commonly credit card debt or personal loans. There’s always the question of whether you should invest in passive income streams or eradicate debt first.
The average APR of a credit card is significantly more than you’re likely to achieve in a passive income stream such as the stock market. So it makes sense to first attack any unsecured debts that you have.
Once you have your budget in place, you can calculate how much available you must pay towards your debts each month. This is even more important as your salary begins to increase because you can then make bigger repayments and remove the debt quicker.
Removing the debt also has a strong mental effect as you won’t have it hanging over your head long term. Especially if your long term goal is to buy a house then it’s even more recommended to reduce debt first so your mortgage application becomes even stronger and likely for acceptance.
Have a Budget
You might be seeing a pattern in personal finance that almost everything revolves back to having a budget. The only way you can truly understand your spending habits is to continuously track how much you’re spending each month.
Keeping a budget ensures that your spending is more likely to stay on track and you can monitor your areas of concern. Creating a budget can be as simple as getting a pen and paper and writing out your expenses and incomings.
Ideally, your expenses should be lower than your incomings but this gives a clear picture of what areas of your budget need work. You can then see what your necessities are and begin to reduce the unnecessary spend which you can then use from debt reduction or wealth building.
At ownyourbricks, we have a free savings template that allows you to save towards specific goals which help you stay on track.
A budget isn’t set in stone and you can continually amend it if you realise you’ve been too tight or loose in specific areas. It’s still about having a comfortable life and not about suffering.
Re-invest in Wealth Building
A great way to stop lifestyle inflation is to reinvest your extra money into creating more wealth for yourself which will help you get to your long term goals quicker. You mustn’t use this extra revenue generation as monthly liability spending.
Passive income can come in a wide number of forms such as stock market investing or affiliate marketing. You could also invest it in yourself to learn new skills that can be used for freelancing.
The passive investment vehicle you select will depend on your risk tolerance and how much spare cash you have available. This is where compound interest starts to do the hard work for you.
Saving should usually be the first port of call to avoid lifestyle inflation but once you have an adequate emergency fund you can then use it to grow your life.
Don’t Forget to Treat Yourself
Now avoiding lifestyle isn’t all bad news. You’re driving yourself crazy if you restrict yourself from enjoying life. Creating a budget isn’t all about restricting spend but also deciding how much you’re going to spend on fun things.
If you get a pay rise then decide how much of it, you’re going to designate towards fun. You should always have your way of celebrating progression within your career.
Wait 30 days before Committing to a Purchase
How many times have you bought something based on pure impulse even though you might not need it? When we purchase products, a chemical is released in the brain that makes us happy.
A great way of avoiding the need to purchase something is to apply a 30-day rule which means you need to wait an additional 30 days before you return and purchase it. In most cases, you’ll forget if the item wasn’t needed.
However, if you still want to purchase it then by waiting for 30 days you can fit it into your budget better without having to take out additional debt leaving you with less regret.
Set up Automatic Savings
Out of sight out of mind is a great way to avoid lifestyle inflation. If you don’t have the extra money in your current account then you’re far less likely to spend it, which you can accomplish by setting up automatic savings each month.
You should start by using your budget to decide on a realistic savings rate to reach your target which will be a percentage of your net pay. Then simply set up an automatic direct debit every payday that automatically moves it for you.
If it’s not automatic, then it gives too much room for you to forget or not decide to do it. This money can go to a range of things including your debts, savings or investments. As an ongoing action, the percentage you save will need to be increased as you progress through your career and earn more.
Another great way is to have a savings account that forces you to log into a desktop and delete the app off your mobile phone. This stops you from making impromptu bank transfers into your current account and spending it.
Stick to your Purpose
It’s easy to feel like spending money on unnecessary things when you compare your life to others. But the fact is you have no idea how much debt that person is racking up to portray their life that’s displayed.
By comparing yourself to others, puts you on a one-way path to lifestyle inflation leading to unneeded competition. Ultimately, this comes back to having self-confidence and being secure without feeling the need to fit in.
You’re likely to be one of the few in your friendship circle who’s on this journey. While it’s great if you can bring some of them along, initially you’ll probably be on your own. Outlining your main long term goal will keep you focussed.
You may also need to expand your friendship group to include a wider variety of people with different jobs, incomes and goals. This will help you to better understand that there isn’t just one way to live life and a life of pure excess competing with others isn’t necessary.
The bottom line is that lifestyle inflation is a definite reality but by using these tips you can see it coming before you make a financial mistake. The key to it all is keeping a consistent budget without feeling the need to overspend each month.
Wealth takes time to build but the steps are simple but it takes accountability and focuses on your long-term goals. So give it a go and let me know how you get on.