What is lifestyle inflation? You may guess: it means that our normal living expenses increase as the income increases. What used to be merely sufficient becomes no longer sufficient after we get a raise at work.
There are many economic situations which fall outside this category, but for this article we'll focus on the lifestyle inflation which is really under our control.
We all want to live a better life.
This is the reason we get up the morning, the reason we work hard, maybe even the reason we work on that special report over the weekend. We want to increase our pay and be able to afford nicer things. This is the foundation of a capitalistic society. And it's not a bad thing.
But wanting the next thing can be unhealthy if the balance is off.
The ideal situation is that our living expenses stay flat even as our ability to earn increases. No one really lives this way; life happens. But what is the value in getting a raise if it's all spent before the increase shows up in the bank account. So what are some things we can do to avoid lifestyle inflation? I
1. Be aware. Perhaps you have never thought about this process before. Just recognizing that it may be a problem for you is the first step.
2. Hold to the budget. Do you really need a new car or bigger house just because your income increased? Perhaps, but perhaps not. It's personal, but think through this. In a few decades would you rather have the money in the bank?
3. Work through needs versus wants. Many of these personal finance choices are deeply personal, but try to step back from your emotions and try to analyze your situation. This is really hard for everyone.
4. See the value in modesty. Trying to appear successful is really a futile goal. There is always someone who is doing better, or who appears so. It's not worth it, especially if the desire to appear prosperous is actually putting a crimp on your future financial success.
5. Enjoy the simple things. Fun doesn't have to be expensive. A family celebration is actually more fun in the kitchen rather than at an expensive restaurant. There is time for a nice meal out, but every celebration doesn't have to involve a major expense. It takes more work and planning, but it's worth it.
As with many financial topics, how you work out the balance on these issues is a personal decision for you or your family. But I hope that reviewing the topic has given you something to think about. Lifestyle inflation borrows from the future to fund enjoyment today. Everyone likes a new car! But consider the future value of any excess income you have; if that money returned 10% on average over the next decade or so, would you change your mind?
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