Published September 17, 2108.
How to handle lifestyle inflation.
You got a raise. Congratulations! So how is it you're still just scraping by? You may be a victim of lifestyle inflation.
Lifestyle inflation is spending more because you're earning more. That raise makes you feel like you have more to spend on lunches and shoes, or maybe a fancier car or bigger house. You work hard, and you deserve to treat yourself, right?
Sure, but that sense of entitlement could lead to choices you can't afford, says Sherry Wallis, an STCU member and financial educator.
The key, Wallis says, is to think about how you can manage your money, instead of it managing you. Here are a few tips:
- Check for leaks. Update your budget. "Once you really start tracking your spending, you can see where there are money leaks," Wallis says.
- Prioritize. Start by saving $50, $100, or more a month in an emergency fund, with a goal of setting aside three to six months' living expenses. Second, pay off debts. Then save for retirement (and if your employer matches 401(k) contributions, take advantage right away).
- Pay yourself first. Have money automatically sent to retirement and savings accounts.
- Think logically. Be mindful of the difference between needs and wants. Do you need that $800 bike, or does your old one work just as well for your rides around the neighborhood.
- 30-day rule. You really want the $800 bike. Fine, just wait 30 days. Maybe you'll still want them, maybe not.
- Save to spend. Wait to buy the boots until you can pay outright. And invest now so you have financial stability later. For instance, if at 25 you invested $800 instead of buying that bike, you'd have more than $5,000 at age 65, assuming a 5 percent rate of return. That's could buy a great bike for your retirement.
“Once you start tracking your spending, you can see where there are money leaks,” Wallis says.
Lifestyle inflation isn't always bad. That promotion may mean you need to spend more on your wardrobe. If you're starting a family, you may need a bigger place. The key, Wallis says, is for you to be in charge.
Evaluate your lifestyle and make choices that set you up for financial stability now and in the future, she says. "When you get that increase, think about the things that really make you happy."
The key to managing lifestyle inflation is sticking to a budget. But if you don't have a budget, how do you get started? STCU offers free workshops such as Budgeting 101 that may help.