I often hear someone say they are living paycheck to paycheck, but what astounds me the most is that some of the people that I hear that from, have decent income sources. Even those making more than 6 figures often find themselves living from paycheck to paycheck. This happens because as people earn more, they often spend more. For example, after your first raise, you decide to move into a larger apartment or even buy a new car. This phenomenon is an example of lifestyle inflation which means an increase in spending as an individual’s income increases. Lifestyle inflation is a problem because many people are unable to get out of debt or unable to save or invest towards their long term goals. With that said, I’ve listed out 3 ways to mitigate Lifestyle Inflation.
1. Live Below your Means
Society often portrays those with the most expensive material things to be the most successful. We are surrounded by corporate advertising, branding, and promotions everyday which make us believe that possessing a certain thing will bring us some level of prestige. This causes many people to buy things that are out of their means or are simply things that they cannot afford. Living below your means allows you to clearly distinguish your wants and needs. When you are tempted to buy something, simply ask yourself if you need it or if you want it. For example, if you are in the shoe store and you find a pair of brand new shoes that you like knowing that you have perfectly good shoes now, do you need it or do you want it? Asking this simple question to yourself every time you make a purchase whether it’s for a pair of new shoes, car, or a house, may just save you thousands of dollars a year. In the moment, you may forget or not even ask yourself the question, but practicing a little self-awareness goes a long way. It will allow you to understand your behaviors and may actually lead you to uncover your unconscious mind and behaviors that are leading you to buy things you don’t need.
2. Automate your Investment Vehicles
As soon as a person gets their paycheck, they may be tempted to spend everything they just earned. Automating both your savings and investments from your paycheck will mitigate the odds that you will spend what you don’t have, but will also allow you to prioritize your long term financial goals. This can be done through several financial institutions and even your existing bank where a portion of your paycheck is automatically sent to another account whether it may be your savings or your investment account. To take it a step further, you can also automate your pre-tax income by increasing the funding of your 401K and Health Savings Account. Automating both your pretax and post-tax income are not only effective ways to not spend what you don’t have, but also trains you to focus on retirement as opposed to keeping up with Joneses.
3. Cap your spending budget (Cash)
Completely cutting out a discretionary budget used to buy things impulsively may not be realistic for everyone. Therefore, placing a cap on impulsive buys may be a method that may work with you. One of the most popular methods to segment your spending is the Cash Envelope system where you place a certain amount of cash in envelopes that are labeled by different budget categories. In our case, you can have an envelope that is for discretionary spending from shopping to restaurants. The method can be effective because it allows you to see how much money you have and also forces you to experience giving your money away when you buy something. If you are not a fan of withdrawing or carrying cash around, then you can also call your credit or debit card company to see if they have options to limit usage over a period of time.
Lifestyle inflation to many happens unnoticed where people habitually justify the purchases that they are making without actually needing to make it. We often are surrounded and encouraged to spend by society as a whole where having the most consumer materials are seen as a symbol of success. Although, we can’t completely eliminate social and corporate influences, we can mitigate the effects of lifestyle inflation by living below your means, automating your investment vehicles, and capping your spending budget. Practicing just one of the three will have an impact over time, but all three in combination can be powerful tools to beat lifestyle inflation.
