If you are an avid follower you may already know that in August I wrote a guest post for Josh at Family Faith Finance about how I increased my income by 75% in the past 5 years! If you haven’t already read it I suggest you check it out here.
Besides the shameless self-promotion, the reason I mention this here now is that although my income has increased dramatically over the past 5 years, I’ve managed to keep my expenses at a reasonably low level. By not letting lifestyle inflation take over, I’ve been able to save most, if not all of my pay increases, keeping my savings rate at an average of 52% for 2017 so far.
So how can you too avoid lifestyle inflation?
If you find yourself eager to upgrade your lifestyle the minute your promotion is announced, remember these tips to keep more of your money in your own pocket (or preferably invested to be making you more money).
1. Understand what lifestyle inflation is
Lifestyle inflation is where you slowly start to spend more money as your salary increases. You might upgrade your car to a newer model, move into a bigger more costly house, or purchase clothing and other items from brand name stores because you can ‘afford’ it now. As you get better-paying jobs, it might seem ‘natural’ that you should add to your lifestyle a little, after all, you have worked hard to get there. Recognising that you may be falling into this trap is the first step to avoiding overspending.
2. Give yourself a little extra ‘fun’ money
If you have been living off a student wage/lifestyle for a long time, have holes in your shoes and eat ramen noodles every day then a pay rise might actually justify a slight lifestyle increase. Calculate what your net pay rise will look like (i.e. your raise minus superannuation and taxes) and give yourself 5-10% to play with. This will satisfy your need for a reward but also show you the reality of what the raise actually means – $5000 per annum might really only be $65 per week after taxes (giving you $3.25-$6.25 per week to spend), not quite enough to buy that new car after all, but hey an extra coffee or two per week guilt free if that’s your thing.
3. Socialise with people on your level
When I say ‘level’ I’m not necessarily talking about social class, I’m talking about finding friends with similar level of income and money values. If your friends are constantly organising expensive cocktail making courses in the city as fun nights out, or booking you all into high end restaurants you may feel like you should join in now that you have a little extra money in your pockets. If however, your friends are frugal and enjoy similar experiences to you, or have a similar budget they would like to stick to it is easier to organise events to suit everyone. Lucky for me, my friends are happy with picnics in the park and $5 pot luck dinners.
This can filter down to clothing, cars, houses etc. too. This is a classic case of trying to keep up with the ‘Jones’ so instead find some ‘Smiths’ to hang out with and keep that pay rise in your pocket.
4. Don’t measure yourself in ‘stuff’
Don’t measure your success as a person with the things you own. Owning a bigger car or a flashier house doesn’t mean you are a more successful person or better at life. In fact, while some people with those things may be able to afford them because they earn more, many will be in debt up to their eyeballs. Stop measuring yourself against people and their material objects, rather understand success is having meaningful relationships with family and friends, your health, your ability to give back to your community and enjoy everyday life experiences.
5. Pay yourself first
The three words that have made most of my saving happen without me even noticing. If I was happy with my spending level before, why does it need to change? I simply wait to see what the net increase in my bank account is on pay day and add that amount to my savings. Each fortnight this is the first thing to come out of my pay and be transferred to a completely different account without a key card. The cliché ‘out of sight, out of mind’ is bandied about so much because it is true!
6. Focus on your future
If you are a semi-nerd like me you might have a 5 year plan scrawled in the back of a notepad (a fully awesome nerd would have an excel spreadsheet or other cool plan built but as you all know, my design skills aren’t that great – see my money map for proof). In that plan I’ve accounted for at least a 2.4% increase each year while working my butt off to earn more. I can see exactly where this money will go in future; house, renovations, eventual car upgrade, babies (associated expenses –I’m not going to buy a child). Having clear goals in mind and already allocating the money before I get it means I’m less likely to spend it frivolously in the here and now.
As your income increases, focus on how this can help you achieve your goals and live a more balanced and enjoyable life sooner. Forget about trying to prove you are successful to all the wrong people and know that those who matter most won’t care what your pay check says, but will remember you spending time together – which you can do more of if you reach financial independence more quickly 😉
Have you experienced lifestyle inflation? Have you got a plan for your next raise?