How to Keep Lifestyle Creep From Devouring New Income

Congratulations! You got a pay raise or a windfall. Here’s how to parlay it into long-term well-being.

Better Investing


This post comes from AJ Smith of partner site Credit.com.

Congratulations! You got a raise, came into an inheritance or sold your home for a profit. No matter what has brought more money into your budget, it’s important to manage that money wisely. Just because you have greater access to money doesn’t mean you should increase your spending accordingly.

The basics of lifestyle inflation

Think back to your first adult job. Likely that paycheck left you with little money for the finer things in life after monthly expenses were paid. Now that you are making more, do you still dream about all you could have with a higher income? This perpetual dissatisfaction and increased spending in accordance to increased income is called lifestyle inflation.

When you get a financial boost that should put you ahead on your big financial goals (or help you pay off debt), if you fall victim to lifestyle inflation you stay in the same financial position. While your monthly expenses rise to keep up with your income, your ability to build wealth is limited. The money is going to non-wealth-building things like more clothes or a bigger car.

This tendency to spend more when you have more can come from feeling competitive with your peers, entitlement from working hard that makes splurging seem justified and even just a lack of willpower. While spending more can sometimes make sense and lifestyle inflation can seem unavoidable, this can get in the way of a secure financial future if it goes unchecked. Check out these tips on combating lifestyle inflation.

1. Keep a budget

Although making a budget may seem obvious, people tend to “forget” to adjust that budget when their circumstances change. Before you start spending or even thinking about spending, it’s important to crunch the after-taxes and expenses numbers to see how this extra money is really going to affect you. This perspective can help you balance your finances more accurately and help you to be more conscious about where your money is going.

Keep in mind that if you put all that spending on your credit cards, you could hurt your credit in the long run. Increasing your credit card spending above 35 percent of your credit limits can have a negative impact on your credit scores. You can see how your credit card spending is impacting your credit scores for free on Credit.com.

2. Assess your values

While you are living in the rat race, it can be hard to remember what really matters in life. Instead of thinking of the next material item you “need,” it can be a good idea to step back and look at the big picture. Consider what success really means to you and use your wealth to get you there.

3. Prioritize savings and goals

It’s a good idea to always pay yourself first — your future self, that is. When you come into money, think about your financial goals and how this increase can help you reach them faster or more comfortably. Whether it is the amount you contribute to retirement or how much you pay down on debt, these changes may seem to be taking from your new spending balance, but can actually help you in the long run.

4. Pick and choose

That doesn’t necessarily mean you shouldn’t celebrate your change in circumstances. It can be a good idea to build some balance in your budget and plan for a reward for your hard work, if you want one. Avoiding lifestyle inflation doesn’t mean you are cheap or a no-fun money hoarder. Just be careful and conscious about where you spend. Identify which purchases really make you happy and which ones will still make you happy about in three months, a year or even 10 years.

5. Avoid comparing

You may feel like you need to spend more to keep up with your family, friends, co-workers or even strangers — but it’s a good idea to remind yourself that you don’t need to lead the same life they do. Everyone has different priorities and circumstances. You can always find someone who has something better than you do and you can always spend more, but it’s important to make an effort to steer clear of peer-pressure spending and focus on what is important to you.

Lifestyle inflation can really sneak up on you when your finances are growing gradually. All of a sudden, you drive a nice car, pay more for clothes, upgrade your housing and eat out whenever you please. This may sound great, but it’s important to make sure you are actually enjoying your inflated lifestyle and not just spending because it’s possible while squandering future goals.

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Stacy Johnson

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