There is a near universal belief that having more money automatically improves a person’s personal finances. This could be the case if an increase in income or a sudden windfall are handled properly, but it doesn’t always work that way. More often than not, an increase in income is followed by an increase in spending. This is commonly referred to as lifestyle inflation and while an increase in spending is not always a bad thing, there is the potential to take it too far. Celebrities and lottery winners are prime examples of lifestyle inflation gone bad, providing proof that having more money doesn’t always equal financial stability. Here we look at ways to avoid lifestyle inflation or at least minimize the negative affects.
How to Avoid Lifestyle Inflation
Make savings a priority. Saving a percentage of your income is the first step toward financial security. When your income increases, your savings should increase as well. This will not only provide adequate backup in the event of a financial emergency but also prevent excess spending.
Plan in advance. If you received a raise today, what would you do with the extra money? Would you splurge on a big ticket item? Maybe you would move to a bigger apartment or buy a new car. Would you put your money in savings or invest in your future? While some people may call this daydreaming or fantasizing, it is actually good practice in establishing a plan for increased earnings. When you have a plan, you are more likely to put your money to good use.
Treat yourself. What is the point of working hard if you aren’t able to treat yourself on occasion. There is nothing wrong with indulging yourself, within reason. Being financially responsible is a lifestyle and one that requires a lot of hard work and discipline. It is for this reason a certain balance must be achieved between what you save and what you spend to encourage financial stability and personal happiness.
Live beneath your means. An increase in income does not change the fact that living beneath your means is the single most important step in financial independence. It doesn’t matter how much money you make if your expenses surpass your income, you are living beyond your means which will eventually take a toll on your personal finances.
Adjust your budget. With more money coming in, your budget will need to be adjusted. A household budget is essential to make sure your financial obligations are met. The best budget is one that accounts for every cent, allocating money for bills, savings, spending and other financial goals. By finding a place in your budget for “extra” money, you are less likely to waste it.
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Lifestyle inflation is a natural part of life. There is nothing wrong with wanting better things or living a better life. The problem occurs when lifestyle inflation is taken to the extreme, which can actually hinder your ability to enjoy the lifestyle you have worked so hard to achieve. When you balance your spending with your earnings, you can prevent this from happening.