Lifestyle Inflation

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Lifestyle inflation is a very slippery trap. You get to earn more money, and suddenly the appeal of nicer things starts to come into play. A new car, a bigger house, expensive holidays, all things that feel like a good reward and deceptively well earned.

But these expensive lifestyle choices usually absorb the additional income. My coworker Joe got a huge pay raise recently. He moved into a much more expensive neighborhood, started driving a fancy car, and began eating out more often. Pretty soon, he realized that he was not able to save much more than he had before his raise. Infact it seemed he ended the month with less money than before the pay raise. That's the deception of higher earnings.

I think it all comes down to being smart with your spending. Let's just say you get a raise like Joe did, you can start by upgrading one or two things and not everything in your life. Maybe a nice dinner once a month or some modest vacation to reward yourself for a good work done but don't raise your overall expenditure. Save or invest the rest after sorting out your basic needs.

I've seen this happen to many. Some people land a good job and start earning in six figures. Designer clothes, high end electronics, and lavish trips follows. Outside, it looks great, but you will always end up with little savings. The moment your job becomes unstable, you will start getting stressed about your finances. This is how most lottery winners end up being broke. They immediately raise their lifestyle to match the money and don't take time to learn Money management.

Another way to fight off lifestyle inflation is just to continue living within your old budget. Just because you make more money doesn't mean that you have to spend more. Keep on living the way you did before the raise, and you will save even more.

The lesson I learned from my own case was that after a promotion, the urge was to buy a new car; instead, I continued to drive my old car and saved the additional money. Now I have a solid emergency fund and feel secure.

Keep in mind that it is not about depriving yourself, it is about being wise. Small, gentle shifts could prevent lifestyle inflation from occurring in the first place. Think of saving a percent of your increase before you ever receive it to a savings account. That way, you won't be tempted to spend it all.

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