I started this series last week, where I gave the first point; “ Do the math- Net worth and Personal budget” You may need to go through this page to read it again. The second point I will be sharing with us today is:
Recognize and Manage Lifestyle Inflation.
Most individuals will spend more money if they have more money to spend. As people advance in their careers and earn higher salaries, there tends to be a corresponding increase in spending, a phenomenon known as “lifestyle inflation.” Even though you might be able to pay your bills, lifestyle inflation can be damaging in the long run, because it limits your ability to build wealth.
Every extra dollar you spend now means less money later and during retirement. One of the main reasons people allow lifestyle inflation to sabotage their finances is their desire to keep up with what is in vogue. It’s not uncommon for people to feel the need to match their friends’ and coworkers’ spending habits. If your peers drive exotic cars, vacation at exclusive resorts, and dine at expensive restaurants, you might feel pressured to do the same.
What is easy to overlook is that in many cases these friends may be servicing a lot of debt to maintain their wealthy appearance. Despite their wealthy “glow”—the fancy cars, the expensive vacations, the private schools for the kids—they might be living paycheck to paycheck and not saving a dime for retirement. As your professional and personal situation evolves over time, some increases in spending are natural.
You might need to upgrade your wardrobe to dress appropriately for a new position, or, as your family grows, you might need a house with more bedrooms. And with more responsibilities at work, you might find that it makes sense to hire someone to mow the lawn or clean the house, freeing up time to spend with family and friends and improving your quality of life. Lifestyle inflation can easily derail your long term goals.
The trap of short term gratification in the form of luxury convenience can delay your plans to get out of debt or distrust your retirement plans.
Let me leave you with 7 ways you can control lifestyle inflation:
- Be aware of your spending choices.
- Do the math of your raise.
- Treat yourself – within reason.
- Set aside a percentage of your income for splurging.
- Add big changes to your budget gradually.
- Find friends with the same goals.
- Set up automatic savings.
Till next week…Start today to create the future you desire.
This posted was originally posted in our Facebook Group: Money Mathematician Network
Temi Alade- MustaphaAuthor Money Maths.