Lifestyle Inflation: Why More Money Equals More Problems

Most of us spend our time dreaming about what we could do if we just had a little bit more money… If we just got a better paying job, what we will do with our raise, or dreaming about what we could do if we won the lottery. However, the reality is, that when our income increases, our problems do as well. Our problems with money increase as our incomes because of our overall spending increases. Whether it be better cars, a bigger house, or fine dining, with our increased income we tend to increase our lifestyle to match it.

This is called Lifestyle Inflation, and it is a common phenomenon in the financial world. This means that when your household income increases, your overall household spending increases. When income increases, things that were once luxuries can become normal. We feel like we have earned these luxuries, because we have the income now, where we didn’t in the past. But this isn’t an excuse to live paycheck to paycheck.

Here are some tips to avoid lifestyle inflation:

1. Don’t take on new debt.

Just because you can afford it. Even if you can afford the new payment, and you can pay it off quickly, that doesn’t mean that it is a financially sound decision. Instead, save up the money and pay cash for whatever it is you want to purchase. Delaying gratification will make the purchase that much more enjoyable in the long run. Dinner out feels like a treat, because it is a celebration with family rather than a meal to fill your stomach. Driving that new to you car will feel freeing knowing that you paid for it in cash, rather than tying yourself and your family down with more debt.

2. Don’t compare yourself to others.

Keeping up with the Joneses can be an endless rat race. And the reality is, the Joneses are probably attempting to keep up with someone else, living paycheck to paycheck on borrowed money too. Instead, find contentment in what you have and buying only what you need. There is more value to be found in life when you are content with what you have, rather than comparing your lifestyle to others.

3. Make real budget changes SLOWLY… And calculated.

If you have an increase in income and decide to make changes to your spending, don’t make them right away. Make the changes to your spending after several months of income have come in, and do them after you have calculated it within your budget.This way you know what areas of your budget are flexible and make sense to move around. Calculating increases to expenses is the only way to ensure that they make sense, and you don’t get into a habit of over spending. Consider increasing the amount of money being sent to a savings account or retirement as well. Whatever it is, focus on your family’s financial goals and overall plan.

4. Value experiences over things.

This is so important in general when living this lifestyle. For starters, you begin to focus less on the material things, the next “big thing” you need to purchase to reach contentment, or to reach success. And you start to value instead the experience associated with your purchase – whether it be a vacation away, a dinner out with family, or a simple game night with friends. The true value comes not from the items themselves, but how we use them, and the time we’ve been given.

5. Focus on your goals.

Rather than using your increased income to buy a bigger house, faster car, or new technology, instead, focus on your overall financial goals. What do you want to achieve financially? What are your big picture goals? Do you want to be debt free, retire early, own your own business? What about saving for your child’s college fund, or going on a family vacation, without using your credit cards? These are the things you should be using your increased income for. Use your new income to focus on your family financial goals, not keeping up with appearances.

The biggest thing to remember when dealing with increased income is to delay gratification. If you can delay gratification on the things you really want, they will be that much more valuable to you in the long run. And delaying the purchase will also keep you in a healthier financial state. A small no now means a bigger yes later. Packing a lunch everyday to work means you can purchase the occasional lunch out with friends. Coffee at home everyday instead of your morning latte and donut, means the freedom to splurge on a macchiato on the weekends. And it makes those moments that much more special, because you don’t get to do them all the time. Think about the last big purchase you made… Was it made mindfully? Or was it impulsively? When you get to treat yourself mindfully, the purchase is built up over time… You research the item you want, and you know exactly what you are looking for. Then you save for it. When the time comes, you walk into the store confidently. You can buy it with cash, and because you delayed gratification, and anticipated the purchase, you walk out knowing you made the right choice. There is freedom in delaying gratification. It increases your buying power.