Lifestyle inflation, it’s almost inevitable. The more money we make, the more we tend to spend. From the janitor to the physician, the secretary to the businesswoman, our lifestyles inevitably expand to consume our salaries.
But the key to building wealth is to spend less than you earn, and then invest or pay off debt with the rest.
Income – Expenses = Wealth Building Capital
If you can learn to live below your means by spending less than you make, you’ll be able to create lasting wealth with the money that’s left over.
So how do you conquer lifestyle inflation once and for all so that you have the funds available to create wealth? Here are a few suggestions:
Automatically set aside a certain percentage of your income
The old saying, “out of sight, out of mind,” works magic for your finances. You never miss what you never see. The easiest money to save is the money that never touches your hand. Make a commitment to save a certain percentage of your income.
This is perhaps the surest way to tame lifestyle inflation. Simply open a savings account and have a portion – say 5% to 10% of your paycheck – automatically deposited to the account. Because you’re setting aside a certain percentage of your income, as your income increases, the amount of money you save increases as well.
Live like you did before your income increased
When I graduated from college I no longer wanted to live like a poor student. My very first purchase was a brand new car. Because I refused to have any more roommates, I also rented my very own apartment.
But looking back, I clearly see that if I had continued to live like a college student for a few years after graduation, the money I could have saved and invested would have been worth over one hundred thousand dollars today.
Herein lies one of the keys to conquering lifestyle inflation. When you graduate to another financial stage of life, live as you had been living before the change, at least for a little while.
When you graduate from college, for example, continue to live like a college student, perhaps by getting a roommate, taking advantage of free activities instead of paying for entertainment, or taking public transportation instead of purchasing a car. Even if you do this for a year or two, the money you save and invest can put you on the path to wealth creation.
Likewise, if you get a new raise or better job, continue to live like you did before the income increase, if just for a little while, and save or invest the difference.
Continue to budget
Many people believe that budgets are useful only for those who are struggling financially. But budgeting is important no matter how much money you make. The only difference is that when you make more money you’re able to budget more for indulgences, while making sure your other financial obligations are met.
Many experts advocate the 50-30-20 Balanced Money Formula with fifty percent of income going towards basic necessities, thirty percent going towards “wants,” and twenty percent going towards debt repayment and savings/investments.
As you can see, with the 50-30-20 Balanced Money Formula, as the amount of your income increases, so does the amount of money directed toward debt repayment and savings/investments.
Be conscious of what you’re spending
It’s often the little indulges that gobble up any extra income we come into. The extra pedicures, dinners out, trips to the mall, and other splurges may seem innocent enough, but when totaled, they often consume all the extra income we’ve received. That’s why it’s so important to track your spending. Many programs, like the one at Mint.com, allow you to easily and conveniently follow your spending.
Forget the Joneses
Often, lifestyle inflation is the result of an unconscious attempt to keep up with those around us. The neighbor’s new luxury vehicle or the co-worker’s beautiful new home may unconsciously influence our spending habits as we try to “keep up with the Joneses.”
This can place a heavy toll on our finances. Stop basing your spending decisions on what others have. Instead of spending to impress, spend money on only the things that truly make you happy.
If spending time with your kids is your source of happiness, why waste two hours of your life each day in traffic commuting to your over-sized home in the suburbs? A smaller house closer to work that allows you to spend more time with your family might make more sense.
Perhaps your passion is visiting new places or experiencing new cultures. Then spend liberally on travel, but put a lid on other expenses that provide little value in your life.
When you spend money on what truly makes you happy, instead of spending money based on what other people have, you can effectively nip lifestyle inflation in the bud.
Tame lifestyle inflation, even just a little bit, and you’ll have money left over to create wealth.
BMWK: How do you tame lifestyle inflation?