Earn More . . . Spend More? The Danger of Lifestyle Inflation
Maybe you finally got a “real” job – one that pays for more than your (very) basic living expenses. Or it could be that your boss decided to reward your decade-plus of hard work with a well-deserved and long overdue raise. Perhaps you just got a healthy chunk of cash in the form of a bonus, a tax return, or an inheritance from your recently departed Great Aunt Zelda.
There are lots of ways you can suddenly find yourself with cash to spare. It’s a great feeling, to be sure – especially if you’ve faced money struggles in the past. But if you’re not careful, you might learn that your newly improved financial situation can lead to overspending.
Put simply, the more money you have, the more you’ll want to spend. Some folks call this “lifestyle inflation.” Others call it “lifestyle creep.” Whatever you call it, it’s a very real phenomenon. So, how can you make sure that your living expenses and spending don’t move on up every time your financial situation improves? Whether you’ve found yourself with a new or better-paying job, a raise, a bonus, or an unexpected inheritance, here are eight sure-fire ways to keep the creep in check:
- Save it! The easiest way to resist spending that extra cash? Put it in your savings account immediately, then forget about it. You can even set up automatic transfers to move a specific amount from checking to savings on a weekly, bi-weekly, or monthly basis (this is an especially helpful strategy if you’ve recently gotten a raise or a job with a higher salary).
- Revise your budget. If it’s been a while since you reviewed your budget, spend an afternoon updating it to reflect your new financial situation. Maybe you’d like to use part of your raise to beef up your emergency fund, or perhaps you want to use your tax return to jumpstart your retirement savings. While you’re at it, make sure to look for expenses that you can cut, like that unused gym membership or the daily stop at the Starbucks drive-thru.
- Focus on debt. A higher salary, bonus, or other cash windfall can help you take a bite out of your high-interest credit card debt. If you’ve been struggling to pay down a balance, use the extra money to cut your credit card balance down to size – or, even better, pay it off completely. A smaller (or zero) balance will improve your credit score, shrink your interest payments, and probably relieve some stress.
- Allow yourself a (reasonable) upgrade or two. If you’ve updated your budget and are pleased to discover that you have your debt in check and a solid savings plan in place, there’s nothing wrong with making a purchase or two to improve your happiness or quality of life. Go ahead and replace that uncomfortable 1990s-era hand-me-down sofa. Splurge a little and get that HBO Now subscription that you’ve wanted (as long as you can responsibly afford to pay $15 a month).
- Resist the urge to go overboard. The thing that makes lifestyle creep so dangerous is that it can be hard to stop. A new sofa doesn’t mean that you need a matching loveseat, a new coffee table, and a new rug to tie it all together. Treating yourself to HBO means you can finally catch up on “Game of Thrones” – it doesn’t mean that you need a new flat screen TV and a surround sound system.
- Set goals. It’s easier to avoid the perils of lifestyle inflation if you’re working toward a financial goal or two. You won’t be as tempted to spend extra money if you know that you’re, say, siphoning cash out of your vacation savings or the down payment fund for your car or home. This is another area where a revised budget can help.
- Be mindful of your spending. In general, we tend to be more careful with our money when we have less of it to spend. When you find yourself with more wiggle room in your budget, it’s easy to justify unnecessary spending by telling yourself, “I can afford it now.” But remember, just because you can afford something, doesn’t mean you should. Make a point to be aware of your purchases. Live within (or even below) your means, and don’t abandon your frugal ways just because you’re taking home a little extra.
- Avoid “competitive spending.” Everyone has “that” friend, neighbor, or family member who likes to put their wealth on display: They’ve got the latest gadgets, the newest cars, the biggest houses – you name it. It may be tempting to show off your “success” with flashy possessions, but you’d be much better off foregoing the status symbols and saving for your future.
Stick to these tips, and you can rest assured that you’re making the most of that bigger paycheck, bonus, tax return, or inheritance. And remember, if you need help getting your finances back on track, rebuilding your credit, budgeting, or negotiating with your credit card lenders, call the friendly team at American Credit Foundation.