Lifestyle Inflation’s a bitch. There, I said it. The old me could have cared less about this stuff, but not anymore! You give me a raise or a bonus or $hit, a $20 birthday bill and you better believe a good portion of it’s going into my savings :)
I’m sure I’ve talked about this at some point in this blog’s existence, but “lifestyle inflation” is basically when you up your expenses as you start bringing in more money. And pretty much everyone I know (including myself) does this to some degree. I mean, it’s kind hard NOT to. When we get a surplus of money it’s only natural we want to go out and spend it! We might not do it that day, or the next week, but over time that urge to upgrade to a fancier car or a bigger house or even sexier clothes gets stronger and stronger. And unfortunately it gets harder to silence if you don’t catch it early on.
So what do you do? Well, first you gotta decide if you actually care ;) After all, most of our friends are upgrading & living the high life so maybe we want to too? Everyone likes nice things, right? You have to figure out if you want all the toys now, or if you want to hold off ’till later and take financial security instead (or perhaps you can find a happy medium? there’s certainly no right or wrong answer here as long as you’re true to your desires).
Then, you’ve gotta come up with a plan. Saying you want to nix Lifestyle Inflation will only get you so far – you’ve got to TAKE ACTION and be aware of what’s going on to make stuff happen. Ask yourself – “What would I do with an extra $5,000? How about $10,000? Or even $1,000?” A business friend once told me that you should always have a plan for every $1 you get. You’ve got to know where you’d put it in advance, and what you can get out of it in return (for example, 5 hamburgers or a 30% profit). While he was referring to running businesses, I think it totally applies to personal finances too. If you KNOW how you’d handle extra money now, before you get it, you’ll be much more successful with it once it arrives. So come up with a plan.
You can also automate savings. Before I got all hardcore with maxing out my 401(k), I used to just bump it up a few % points whenever I received a raise. This way, not only would I be saving more money than I was the days before, but I wouldn’t even miss it! It’s VERY easy to get used to spending more money when you’re bringing in more money – so cut yourself off before you start knowing the difference. And you can also do this with IRAs, bonds, savings accounts, whatever financial tool you wish. Almost everything can be automated these days.
Remember, just because you CAN afford something doesn’t mean you HAVE to. THINK about what’s important to you in life, and how you can best put these newly given dollars to use. If you plan for it now before it happens you’ll reach those end goals of yours much quicker :) And I hope each of you do!
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I always split any raise I get into three parts (which I generally decided based on the mood I am in!!!!!). One part goes into savings in my Never Go Back To Fresno Fund (never been to Fresno…got the idea from a t.v. show), part goes to the snowflake account to pay off debt and the third part goes into the Splurge Fund so I can get myself something nice.
I am a teacher, and since I don’t get all my salary during my work year. It is held so I can money in the summer, since most people can’t budget for 8 weeks of no pay. I get 5 checks at one time. They immediately go into savings and a larger chunk into the long term savings. I use the regular savings account as I need the money, but know that most of it is put away. I am able to save a large portion of my salary all year, so I just do it in a lump sum every June.
@LuLu – LOVE that idea! I’ll admit I tend to go “with the mood too” at times – which is another reason I need to plan better at times so I don’t over-spend in one of the categories ;) Although that really only applies to LARGE increases of money…if it’s $100 or less I just go w/ the flow.
“Remember, just because you CAN afford something doesn’t mean you HAVE to.”
Beautifully, beautifully said.
Raises, bonuses, tax credits, etc. are a great time to sit down and re-evaluate your financial goals and your budget so you can make a conscious decision about where you want that extra money to go. Gotta stay in control of your finances…bad things happen when you let them control you!
I think they key to this is upping that savings immediately when you get the raise. If you increase that automatic savings transfer as soon as your paycheck goes up, you won’t ever see that money in your checking, and you won’t really miss it. As soon as you get a taste of that extra dough, and especially if a “lifestyle inflation” has already happened, it’s so much harder to up that savings because now you have to cut back. Not to say you can’t put some of the extra into savings and some into “lifestyle inflation”…the decision (whatever it is) should be on purpose!
I love your posts.
I always want to buy new clothes when I get a raise or a bonus… but I’ve found that putting some of it in savings, and using the rest to pay off debt or for items that I NEED (such as hygegine products, doctors appts, etc.) has worked.
Sometimes I need to write my long-term goals on a sheet of paper over and over again until they stick in my head. I always write down “downpayment on a house” and “wedding.” Even though they are in a distant future, I hope that both will happen one day, and I need to be ready for them when they come!
A raise is always a blessing and trying to decide the best use of the “extra money” is always tricky. I’d love to be able to go out and purchase everthing on my want/need list but alas I try to refrain. I allocate the money in this fashion:
1. Pay off any outstanding debt (highest interest first)
2. Set aside an ammount that automatically goes to savings
3. Give myself a small treat (manicure, new shoes-something to keep me motivated to save
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I could have used this post when I got my first raise. When I got this raise, I sold our old run-down car which we had bought used very cheaply, but which was still running. I bought a new car for which I couldn’t pay cash. Now I had the income to make the car payments comfortably. Fortunately I got wise very quickly and I have not bought another car since then unless I could pay cash for it. I really did not like writing these monthly checks to pay off the car loan. I much rather make a monthly deposit into my car savings account so that I have cash when I buy a new car.
Fight lifestyle inflation! I’m not hardcore like you J, with maxing out my 401(k) (I’m hoping to get there soon). But one thing my company does offer is the ability to automatically increase my contribution rate each year. I’ve started at 10% and plan to keep the annual increase until I max out my 401(k).
If your company has then, then you can set it up so that the annual increase occurs right around pay raise time. This way, not only will you continue to save more, but you’re splitting the raise with yourself, so you’ll still see a bump in salary! If have a hard time saving then trick yourself into it!
lol thanks for justifying my not running off to buy a wii when i got my raise last year. after paying down a few bills, i setup a smarty pig account to funnel the extra money out of my over used checking account. it’s very exciting to see my little piggy fill up, even if it is slow :)
I always like to say, “It’s okay to have money. You don’t have to spend it!”, because sometimes it seems that people feel allergic to money and have to dispose of it asap!
I really like this post! I totally know people who live outside of their means. I have a feeling my fiancée is sort of that guy, but he tries his best. Neither of us make a lot of money yet, but hopefully we can still live humbly as we pay down debt in the next 5-10 years (or less). I have a lot of student loans and will add more this spring when I begin graduate school, and although his job pays okay money, we will have to learn to work together after we get married to have a good savings plan, even with more money coming in.
I don’t think I’ve had a raise in a long time, but I hope when I do some time in the future I don’t commit this action! :)
Glad you posted about this because I recently had a discussion with someone at work about this topic. I told them that when we got our raise (we all got the same very generous raise), I instantly raised my 401k contribution and upped my personal savings percentages. Why? So that before I get used to the new money, I sock it away in savings. If I don’t ever see it, I don’t ever miss it.
So far it has worked well! I’m Saving like there’s a tomorrow, and a tomorrow and a tomorrow….:)
What happens when you die tomorrow?
What happens if you live till your 110th birthday?
Hard to find a good balance.
My husband and I have become militant savers in the past few years, and I think one of the “curses” of that mindset is we always have more financial goals than money to fill them. Our current goals are to (1) max our retirement savings (we’re close on this one); (2) pay off $132k in student loan debt; (3) save for our (baby) daughter’s college education; and (4) someday save up a 20 percent down payment to buy a home.
With those lofty goals ahead of us, I look at every raise as a way to get us one step closer, and that’s what we “choose” to spend our money on. I’m not actively trying to prevent lifestyle inflation per se, but that’s a nice side product of this.
have you seen this post on tim ferriss’s blog (below)? for some reason, i thought of you when i read it! It seems right up your alley:
forgive me if you’ve seen it already, I can’t remember where I got the link. :)
I think lifestyle inflation is one of the core problems with spending in America. Instead of increasing spending and eliminating debt, you should limit spending and pay things off. If you are normally able to save $500 a month but also have a $500/month car payment, by paying it off you are effectively doubling the rate at which you save. Each item like this that you can get rid of exponentially increases your saving and spending money!
I think I’m going to write my own post on the concept of Lifestyle Inflation. Thanks for the post!
This was actually a key thing we learned when we started our financial adventure.
Any raise that’s not met with an unavoidable increase in our fixed expenses is immediately regulated to savings.
This plan worked out especially well because it was set-up when my wife didn’t have a lot of hours at work, since then she changed jobs to a big jump in hours, and we’ve banked the difference. If we waited, I’m sure our lifestyle would have just inflated to eat up that difference, and instead it’s been a hug help to us moving forward in a much more secure way.
That lifestyle inflation is a killer, without this set-up I know we would have ditched the junker car for another car payment, the junk phone for a nice one or upgraded the living space because that’s what all our friends at “our level” were doing instead of keeping our pretty sweet low-expense lifestyle. I just have to keep reminding myself the peace of mind and lack of financial panic makes it all worth it.
Some people spend like there’s no tomorrow. But there usually IS a tomorrow — and a “next month,” too, when all the bills for what you bought will arrive.
If you’re already doing fine and allowing yourself some fun along with the frugality, why NOT save raises?
Ooh la la, more comments to respond to! Glad you all are enjoying this :)
@The Dad – Hey! Haven’t seen ya in a while, nice to have you back :)
Jenna – I like that! “Gotta stay in control of your finances…bad things happen when you let them control you!” So true… also on quickily upping your savings rate before you start noticing it. If you go too long it’ll be much harder to start saving consistently again. Still possible, just not as easy. Esp if you forget!
Lauren – Thanks Lauren, I really appreciate that :) Agree that writing your goals down helps too! I’ll even sharpie them on my hands sometimes so I stay inline. I also know someone who writes them on a sticky note and sticks them in his pockets so whenever he takes stuff out he sees them ;)
Suzanne – Small treats are a definite! Can’t be hardcore all the time or you’ll go insane. Well said.
Money Obedience – Yeah, I go back and forth on having a car payment or not. for the last 2 years I haven’t had one (and loved it!) but at the same time I feel like I should finally treat myself to a nicer one where car payments are needed for a bit. Like a Benz ;) I doubt I’ll pull the trigger anytime soon, but it’ been on my mind a lot lately.
Ace @ aceofwealth.com – Well, my 401(k) matches are gonna go out the window soon so I gotta enjoy every last second of it while I can :) You’re rockin’ it out just fine my man!
@michelle – Did you see my giveaway yesterday? You bette check it out – giving $200 in SmartyPig giftcards away!
@Yana – Haha….indeed.
@Megan – “I have a feeling my fiancée is sort of that guy” hahaha…oh man, you crack me up. Maybe you can work on him ;)
@MyFinancialObjectives – And contrary to what lots of people like to say, “tomorrow” usually comes! And if not? Well, more money for our family.
@StackingCash – Hah! good timing, read the above comment ;) I think you can be happy with money saved up whether you live long or not. I mean, if blowing $200 is ridiculous to me I’m not going to do it no matter when I’m leaving this Earth – ya know? I say we just have to keep on living the way we feel is “right” and the longer we do it, the longer it will be better for us :)
@Retirehappy – You guys are rocking it! Well done!
@Sense – Haha….well, I don’t know if you got it from me or not, but I did link to it the other week ;) Great article!
@The Best Money Blog – Yeah, do it! I find this topic very very interesting…will be cool hearing more on it from another perspective. (although our perspectives will prob be around the same :) so, maybe in a different writing style then?)
@Kevin I – Financial Panic is so over-rated ;) Keep it up!
@Donna Freedman – Amen sister, that’s why I like ya.
I was raised that you spend only the money your money made for you. Have a $1, you can spend that dime (okay, those were better days back then). The point is, don’t spend your principal, let it work for you, heck if you can, let the interest work for you too. But if you HAVE to have something wait until you money earns you the money to buy it.
I like that! A LOT. Do you know how much wealthier we’d all be if we followed this? I can’t even imagine.