Last week, I gave a talk on Impostor Syndrome to PhD students at Weill Cornell Medical College, The Rockefeller University, and the Memorial Sloan Kettering Cancer Center. After the talk, a PhD candidate asked me what other pitfalls he should look out for in his young adult career. This post is for him any anyone else thirsty to be better.
Lifestyle inflation is a reality that most people today face. It occurs when a person’s income increases, and they match that increase with more expenses. It’s a natural reaction to want to spend the extra money you worked so hard to make. The result, however, is lifestyle inflation.
You may be wondering, “what makes lifestyle inflation so bad?” It can cause difficulties if you are in student loan or credit card debt. Or if you want to save for a house or retirement. Without the extra income to put towards paying off debt or into an investment, it will be difficult to achieve all the financial goals that you have set for yourself. This is the main reason why people tend to get stuck in the rat race of a job, even if they don’t enjoy the job, and even if the job doesn’t pay as much as they would hope. Such individuals are working purely to pay the bills.
Why does lifestyle inflation take place?
There are several factors that can lead people into lifestyle inflation. Some examples are below. If you are experiencing lifestyle inflation, some honest reflection about which of these root causes got you into your situation should also help you to get out of it.
When people get more money, they naturally tend to spend more money. This is a normal occurrence that needs to be tempered. For example, people tend to spend money on luxury items (items that are not necessities). While it’s fun to have nice, new things, there are always newer items coming out next month that will leave you forever chasing.
Trying to Imitate Others
When you see someone driving a BMW to your office, it’s hard to not feel a twinge of jealousy. When it comes time for you to buy your new car, it becomes just a little bit harder to resist getting your own BMW, even if it’s a bit outside of your price range. Likewise, when the person who works next to your cubicle purchases the newest smartphone, you will naturally get the impulse to get one yourself. This is a feeling that you get to imitate others. It’s so common in our society that it has its own phrase: you are trying to “keep up with the Joneses”. Similar to natural tendency, staying on trend is even more tricky because it challenges your desire to fit in. If you don’t resist it, however, you’ll wind up with a lifestyle inflation that’s so bad, you wind up in even more debt that you started.
Lack of Financial Knowledge
Lack of knowledge about your finances can also be a prominent reason why lifestyle inflation occurs. People who have a solid understanding about financial management don’t tend to spend more money with their increasing income because they understand other, smarter things they can be doing with their money. That’s because they take a look at the big picture and they focus on saving more money for the future.
How do I overcome lifestyle inflation?
Now that you have a clear understanding of some of the more common reasons why lifestyle inflation takes place, it’s time to take a look at some strategies for overcoming it. Here are three tips that can provide some much-needed assistance to you with eliminating lifestyle inflation.
Have meaningful long term goals
To start, create a financial plan for the next five years, the next ten years and the next twenty years. What types of investments would you like to have? Where would you like to live? How big of a family will you want to support? What type of lifestyle do you want? When do you want to retire? How much would you like to earn each month when you retire? With the answers to these questions in mind, you will be able to estimate how much income you will need and how much you need to spend, and where. Then you will be able to make sure that you don’t find yourself in uncertain paths, spending money you have allotted somewhere else.
Keep your goals front and center
You will come across a large number of unexpected financial situations in the future, all of which will challenge you and your financial plans. No matter what you come across, it is important to keep your goals front and center. If you need to make sacrifices to your savings goals now, be sure to adjust your monthly savings goals in future years to accommodate and ensure you reach your goals on the original timeline you set. Without these adjustments, the goals you set will become further and further away, making you the next victim of lifestyle inflation.
Save the raises
When you get a raise at work, your first impulse should be to save it. Tuck that money away into a bank account as quickly as possible so that you do not touch it. Just because you are earning more money doesn’t mean that your expenses need to increase as well.
Lifestyle inflation is a real challenge, and the number of people affected by it is growing every year. If you take the time for honest reflection, financial planning, and goal setting, you can help to prevent lifestyle inflation from impacting your life.