If there ever were a time to feel like spending money, it may be with the arrival of your first paycheck. Now that it’s July, graduation season has just finished. If you’re a lucky new grad, you have a job lined up or one on the horizon. And with that new job and those first few paychecks may come the urge to spend on what you couldn’t afford before. You have freedom and money to out at nice restaurants, pay for quality entertainment, and dress in nicer clothes. Improving your standard of living sounds like a good thing, right? But it can also come at a cost. So can you afford to inflate your lifestyle?
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What is lifestyle inflation?
Lifestyle inflation happens when you spend more money as you make more money. People often do this without realizing that they are doing it. It can leave them wondering where their money went and why they are earning more but can’t seem to save and meet their financial goals. Consider these examples:
Your college apartment was $250 a month when shared with three other roommates, but now is $1000 a month living on your own.
Your grocery budget was $100 month when you ate at home all the time. Now it runs $250 a month because of eating out regularly.
You didn’t take a single vacation for the past four years but now have a few domestic and overseas trips planned for this year alone.
A raise a work earns you $500 more per month, but you spend $1000 more a month by moving to a bigger apartment and going out more.
Why do people inflate their lifestyles?
People inflate their lifestyles for a number of reasons.
Keeping up with Joneses – The need to fit in with social peers or aim for higher social standing cause many people to spend beyond necessity. When someone arrives with the latest car or technological gadget, you might feel the need to go out and buy it too, lest you be seen as worse off than your peer. There’s no doubt that this level of lifestyle upgrades and consumption is costly to maintain over time.
Professional appearances – Professional jobs require a certain level of dress and grooming. Someone who works in sales with clients may want to drive a high-end car or wear a large engagement ring to indicate their success. A guy who wants to impress a date may take her to the swankiest restaurants in town. This can be costly to maintain too.
Self-indulgence – Let’s face it, opportunities to spend money are everywhere. Every which way you turn, something new and shiny is available for purchase. We’re led to believe that these purchases will make us happier or make our lives better in some way, whether that’s true or not. It takes a lot of self-discipline to say no and that discipline can wear down when you come into more money.
Rewarding yourself – An increase in income is frequently the result of a job promotion. That means more work responsibilities and longer work hours. Spending can be a way to treat oneself for hard work and to combat additional stress.
Some lifestyle inflation can be good for you though. Sometimes the reasons are legitimate and the increased spending is worthwhile. If you only ate ramen for dinner as a student, you may want to vary your diet now to improve your health. You might have dressed in jeans and t-shirts during school and now need to buy professional attire for work. Or you eat out in order to treat your mom and dad to a nice meal once in a while. It’s hard to deny that these things aren’t necessary or at least very much appreciated.
What is the downside to lifestyle inflation?
When you inflate your lifestyle, you might find that it’s not as easy to meet your financial obligations and goals as you would like. You may have to take a job with a higher salary versus a preferred job in order to keep up with spending habits. If your goal is early retirement, you might have to work a few more years in order to reach financial independence. You’ll delay meeting your financial goals.
Have you heard stories of people who won millions of dollars from the lottery but ended up broke and filing for bankruptcy a few years later? How did that happen? The simple answer is that they inflated their lifestyle and spent beyond their earnings. The same can happen to anyone who is not careful about managing their new income.
No need to get scared though. While it’s easy to inflate one’s living standard, it’s also easy to deflate it.
How to fight lifestyle inflation
1) Determine your needs versus wants
When you inflate your lifestyle, items that were once luxuries are now considered necessities. Turn those back into luxuries for the occasional indulgence. One example is if you used to take public transportation but have gotten in the habit of driving or taking an Uber or Lyft to work. Choose to carpool, take the bus, bike, or walk. It may take a little more time and planning, but you’ll save and see the results in your bank account.
2) Prioritize you wants
Prioritize spending on the things that matter most to you and cut back on everything else. You may value having your own apartment instead of living with roommates but make up for it by cutting back on going out. If you love to travel, you might make the most of your time and money by traveling but live with roommates when you are home. It’s rare for people to have every luxury they want in life. Knowing yourself and your priorities will help you determine when to spend and when to save.
3) Prioritize retirement and savings even more
An increase in income is the perfect time to increase contributions to your retirement savings. Take out a calculator and calculate how much more money you’ll actually have in the bank after a raise or bonus. It might be less than you think after taxes. Try to set aside a portion of that new income for your retirement funds, savings, or any other financial goal you may have. If you’re living a comfortable life and don’t need to spend any of it, that’s even better. Your future self will thank you for having tucked that money away.
4) Make incremental changes
If you’re considering increasing your living standard, opt for small changes first to determine what you really need and what you can live without. One example is when getting a new apartment on your own. Instead of signing a lease on a luxury apartment, start with a more modest rental and see if that satisfies your need to live on your own.
5) Pick a partner with solid financial values and goals
Given that finances are a leading cause of conflict in marriages, it makes sense to partner up with someone with solid financial values and goals. He doesn’t have to agree with you on everything, but he should demonstrate that he is financially responsible and open to working towards bettering both of your financial situations. Finding someone who’s like-minded on being financially savvy will save both you a lot of headache in the long run.
It’s a wonderful thing to earn more money. But don’t let that additional income slip through your fingers. Be mindful to avoid unnecessary lifestyle inflation, and you’ll soon find yourself on your way to meet your financial goals. There’s no better time to start than with those first paychecks.
When thinking back to when you started earning a paycheck, did your lifestyle inflate with your earnings? What are some ways that you’ve reined in spending or that you’ve avoided lifestyle inflation? What are some things you prioritize spending money on?