Our definition of "living within the means" changes when our income increases, and we begin spending more money than usual. First, the grocery list gets lengthier, then comes the dine-outs that we start saying “yes” & later creep in our super expensive over-budget wardrobe purchases. If you have done any of the above or more, it is safe to say that lifestyle inflation has taken over your wallet.
Expenditure on non-necessities can be increased when one has greater disposable money which makes it challenging to pay off debt, save for retirement, or accomplish other major financial targets.
What happens during lifestyle inflation?
Lifestyle inflation causes many people to live paycheck to paycheck, make the minimum payments on their credit cards, and lack cash resources to fall back on when an unforeseen setback like a medical emergency or job loss occurs.
It's possible to avoid lifestyle inflation by consciously establishing spending and saving amounts. Setting up an automated savings plan can be a good way to ensure that savings goals are met, and spending is capped. Avoiding lifestyle inflation can mean achieving financial independence at a younger age, having the financial flexibility to choose a dream job over a higher-paying option, and retiring early.
Give below are more practical ways to overcome lifestyle inflation
Calculate Real Changes to Budget
After taxes and expenses, the real change in income is often less significant than it appears. Take the time to calculate the actual change to your budget and determine how that extra money will impact on you.
Value Experiences Over Things
Consider investing in experiences. Going on a vacation or signing up for an educational class can create moments that give you lasting satisfaction.
Take a moment to pause and say what you really care about. Is it to buy all the things you want to have or as Tim Ferriss writes “to do all the things you want to do and be all the things you want to be. If this includes some tools or gadgets so, be it, but they are either means to an end or bonuses, not the focus.”
Make Gradual Changes
Avoid making huge changes to your lifestyle in the first few weeks; instead, celebrate modestly. Focus on making small changes, changes that you can handle extensively. Have goals for your bigger purchases, this way you can optimize the new income and swift smoothly into handling the money.
A few extra bucks of income create this tendency to make big changes to lifestyle, we often forget to ask ourselves – Where do we draw the line between wise spending and giving in to the tendency? How do we make our lifestyle shifts more sustainable and not cause financial havoc?
Got you thinking there, didn’t we?
Before we put our money to work, we need to understand and establish a way to stabilize our incomes. There’s a promotion, there’s an income influx through various streams, but there’s never enough as we come down to month-end. We wrote 6 methods you can apply starting today to stabilize your income.
1. Analyze your purchases: Understand your money on an intimate level, analyze every purchase – this will allow you to see the daily flow of your money, which will give some context on to how you got into your current state.
2. Create a current budget: If you have never given yourself a budget, understanding where you are is crucial before knowing where you want to be. Even if you have only 1000Rs, you should know where those hundreds are going.
3. Identify your Goal: Financial goals are personal & differ, so pick your goals as per you. Make sure to have a rough sketch in mind on what do you want to spend in the future, a trip, a gadget or saving up for your wedding – Having a vision will help you understand where to keep your money invested.
4. Create a Goal budget: In order to accomplish financial goals, you need to have an idea of how your life would look like to get through those goals. These questions might help: How much will you be saving every month? How far are you from your ideal budget? Take time to notice how you are handling money today to how you should be handling money.
If need be, use frameworks for e.g., 50-30-20
5. Find a financial buddy: There are a lot of things you might have to say “No” in order to get to your financial goal plus we all need a place free from judgements, a place of accountability to get better at the newer challenges we take up – a financial buddy to make the journey easier.
6. Learn to speak the language of money: You might want to get a bit advanced with your money language, basics like simple interest v/s compound interest can go long way. With a few key concepts in mind, it is easy to contextualize new information and make better decisions.
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