What is lifestyle inflation?
Lifestyle inflation refers to an increase in spending when an individual’s income goes up. Lifestyle inflation tends to become greater every time an individual gets a raise and can make it difficult to get out of debt, save for retirement, or meet other big-picture financial goals.
Eight ways to combat lifestyle inflation
1.Sticking to a budget
Salary Finance a lending institution in the UK recently produced a report which found that people fall into 5 categories in the workplace as outlined on the graph below. These 5 categories are Strugglers, Copers, Builders, Planners, and Prosperers with Struggler obviously being the worst category to find oneself in and Prosperer being the best. Now, here is where it becomes interesting, what they found is that all the 5 categories understand the importance of saving and having a good budget. Check out the graph below.
What differentiates a financial Prosperer from a financial Struggler is their capacity to enforce and stick to a budget. Salary Finance found that only two of the categories financial Planners and Prosperers have built the discipline required to save. So stick to your budget as much as possible!
2. Automate savings
Automating savings can help you benefit from reverse budgeting and give you a great savings structure. Set up an automatic transfer from your current account to a savings account as soon as you get paid and I guarantee that after the first few months you will adjust your spending habits accordingly and won’t even miss the money.
3. Spend mindfully
Challenging the status quo in your spending and embracing gratitude can help shift your perspective, to ultimately a happier and more disciplined consumer. Often lifestyle inflation creeps up as one small spending choice is added to another and before you know it you have accumulated a whole host of unnecessary expenses which often add little to your overall wellbeing. If it’s not an essential item, just pause and reflect before buying it.
4. Salary increase = savings increase
Small lifestyle upgrades can be justified when your salary increases but you don’t need to spend all your extra monthly income, in fact you should avoid doing so. A salary increase should mean an extra saving increase and by increasing the monthly automated amount you will ensure that as you earn more, your savings work more for you too.
5. Set a splurge budget
Bestselling author Jordan Peterson has a chapter in his book “Treat Yourself Like Someone You Are Responsible For Helping” and his advice definitely rings true here. You can’t be a tyrant to yourself it’s not sustainable, decide how much to give yourself for purely fun stuff each month or each time you receive a raise or a bonus. Then stick to it and squirrel the rest of the money away to build wealth and achieve your long-term financial objectives.
6. Upgrade areas of your life gradually
If your income receives a boost it might be tempting to buy a property, upgrade your wardrobe and buy a membership to a more expensive gym all at once but it’s not a good idea. Introduce lifestyle upgrades gradually to test the new budgetary waters and ensure that you aren’t overcommitting on monthly expenses.
7. Find your lifestyle tribe
Feeling the need to ‘keep up with the Joneses’ is stressful and a deeply unsatisfying way to live. Surround yourself with friends whose lifestyle goals are aligned with yours and who won’t constantly be tempting you to overstretch yourself and derail your long-term financial plan.
8.Live within your means
That means saying no to certain things in your life. Yes, many of us desire wholeness & completion across the various areas of our life, but at what cost? Even the most reasonable version of yourself would acknowledge that buying things you can’t really afford, will not serve you well in the long-term. And if you do plan on making a large purchase such as buying a house, my only question would be have you sat down and worked out the numbers, people buy on emotion of course but big financial decisions should be broken down and rationalised before you make the final decision to buy.
Successful financial planning is all about balance
Lifestyle inflation involves choosing instant gratification over, achieving long term goals. If you decide to satisfy your every whim in the present at the expense of saving for the future, you are sacrificing your long-term financial stability. The key is to strike a balance and afford yourself certain luxuries and treats while also saving for the future and ensuring that your savings increase proportionally as your earnings rise.
If this article has resonated with you and you feel you need someone to hold you accountable and would like an extra resource of a list of the average cost of many common goods and services in Shanghai, then get in touch today at firstname.lastname@example.org.
I work as a Financial Planner with expat clients to meet their financial planning needs and goals, with a focus on adequately protecting expats & their families, and helping people to grow their savings over the long term. I strongly believe in building meaningful and lasting relationships with clients to ensure the best client outcomes are achieved.