The achievement of financial independence is the primary goal of any reasonable person. However, most people around the globe live from paycheck to paycheck. And, even if the salary is systematically increased, the rule does not change. Why is this happening? The term «Lifestyle Inflation» is used to explain the above phenomenon.
Lifestyle Inflation Definition.
What does Lifestyle Inflation mean? It’s a process when people don’t get better prosperous due to revenue growth because spending also grows proportionally. The term Lifestyle Creep is synonymous.
How often have we heard you say you’d save more if your wages went up too?
And then you were surprised to discover it wasn’t working.
People get trapped and inevitably end up in poverty.
In 1955, British historian Cyril Parkinson formulated and published an article on Parkinson’s Law. Some of the generalized concepts of such a law were named the rule of the inevitable enlargement in expenses proportional to the growth in revenues.
The desire to imitate successful friends also plays a unique role here. For example, if your colleague has a more expensive car, you want it too. And maybe even better. But in the situation described, the car you had, was decent and did not require replacement during the other five years. But you decided you could afford to disburse the cash.
Or your neighbors moved to a prestigious neighborhood and assumed you wanted to be with them. What was wrong with your house? Nothing. But you wanted better accommodation.
Understanding the content of the principle permits managing the level of Lifestyle Inflation.
Not all groups are at risk of falling into the trap of their spending. We consider the situation with the growth of young people’s wages becoming stable from the age of 25 onwards. University graduation, career advancement, and first-time labor achievements provoke the desire to pay additionally. They try to provide themselves with decent housing, gadgets, and clothes. It is possible to visit expensive restaurants and clubs and travel independently or with family. By the age of 35, there is an understanding of working exclusively on salary. There are usually no savings; there are no active investments.
The phenomenon worked in its direct path. Just now, the person realizes the necessity to control the Lifestyle Inflation.
The second risk group includes pensioners. They have completed their careers and have many banknotes in stock. But no one wants to give up their living standard before they retire. It could play a nasty trick in misplanning retirement savings. If your budget fails to maintain your primary standard of living during the next 30 years, you will go bankrupt or drown in debt.
Examples of Lifestyle Inflation.
Most people expend more capital if they have it.
- A good example would be a college graduate who, in his student years, saved on food, clothing, and essential needs. After graduation, he lived in a friendly, well-rented $800 apartment, earning his first paycheck. He moved to an expensive neighborhood a few years later and rented a $1,500 apartment. He is able to afford it. But it wasn’t necessary. He just wanted and had the opportunity.
- The following example is a divorced waiter girl who has a small child. Her family’s gain has been cut in half, but outlays remain high. She provides herself and the baby with only the essentials. This girl doesn’t buy toys. She limits sweets and stops taking her kid to educational classes. The girl then finds a well-paid remote job. It allowed her to rent a good home, buy many unique toys, and invest in the development and her child’s education.
From these examples, it is clear that our demands are limitless. It is a characteristic of the human psyche that leads to ever-increasing costs. If you have funds, you’ll expand them.
How to Avoid Lifestyle Inflation
Unchecked spending of money leads to poverty. Developing a behavior strategy with finances aimed at avoiding bankruptcy and giving up living from paycheck to paycheck is necessary. Some of our tips will allow you to avoid Lifestyle Inflation.
1. Manage expenses.
It is not enough to make profits to achieve well-being and financial independence. Fee control is a crucial factor. Our job is to find out where the finances are going. To begin with, you must define the cost categories to the penny. It takes about 2-3 months of permanent recording. Keep track of developments from month to month. The available mobile finance control applications assist. The more accurate your records are, the stupid eat-up your income expenses are discovered.
Each category must be detailed. It is the only way to discover unnecessary acquisitions: chips, cola, snacks, chewing gum, etc. You’ll be surprised what part of the budget they occupy. Determine the required, desirable and unnecessary costs. Always remember the list when you want to buy another useless thing.
Costs shouldn’t increase proportionally with the profits growth. So if your earnings go up by 50 percent, increase your expenses by only 30 percent, and the other 20 percent improve your savings.
Analyze your emotions concerning money. Determine what brings you true satisfaction and what acquisitions are only a momentary rise in mood. It helps to separate what is required from what is unnecessary.
2. Prepare a budget
The budget is a financial plan. Planning is divided into the short, medium, and long term. The main task is to set a financial target. You must list what you want to attain: home, apartment, car, education, own business.
The budget is a practical tool to achieve the goal. It helps eliminate unexpected waste, such as insurance payments or taxes. When allocating funds, consider the requirements of all family members.
It’s essential to pay less than you earn.
However, we cannot say saving is the way to success. It is better to multiply your earnings.
A good way is to invest. The certified financial consultant helps to understand the issue.
For instance, a bank deposit is suitable to achieve short-term goals (travel, car purchase) in the next 1-3 years. It is applicable to open an individual investment medium-term fund, bonds. Buying corporate rights and shares is the ideal 10-year investment option, as profits can only be obtained long-term.
Budget categories are divided into assets and liabilities. The first one is profitable or is used according to the described purpose. The second one does not increase and perhaps even decreases. For example, the vehicle you use in your job uniquely refers to the assets. An apartment with no one living is called a liability. But an individual may change his status by renting.
3. Save part of your income
Everyone must bring a defined process to automatism. Defer at least 20% to the reserve from each of your wages. It should be on income day. It’s going to be harder to save every next day.
We understand your desire to live better here and now. But it is rather a path to poor old age.
The capital has to work. Everything you put aside shouldn’t lie inactive. Spend a piece of the reserve fund on investment, turning finances into an asset.
Refrain from sudden, unforeseen, and emotional expenses. It negatively affects the size of the safety cushion. Such expenditure is harder to return. Try to ensure all current fees are covered from the remaining capital. Sometimes, a bad mood prompts impulsive deals. It brings only brief satisfaction and creates a gap in the budget.
A great way to explain the necessity to save: savings provide your income, and assets increase the seller’s revenue. Remember this before you buy something and think about whether you need this item.
Finance is your responsibility. Being in poverty, you may get out of it. Do not count on anyone’s help.
4. Give up your life on credit.
Perhaps, someday you have repeatedly faced the need to take credit. And was such a debt justified? Did you require cash? Or did you just want to live your life the way your income doesn’t allow?
After receiving any kind of earnings, the first thing to do is pay off debts. Do not accumulate them. It is a snowball that destroys you. The most painful strategy is to take the next loan to repay the previous one. Guarantee of early bankruptcy.
You need to talk about a repayment system with your bank if you do not want the penalties after late payment to be more than the principal amount of debt. A significant role here is an honest conversation with the creditor and searching for ways the bank can get its money back, and you remain solvent. Bondsmen or close friends can also come to the rescue. However, promise yourself not to repeat previous mistakes. Debt to a third party deprives you of your aspirations and desires during the period of its existence. You are not the master of your life.
Capital must be channeled into investment and turned into an asset by getting rid of debt.
5. Introduce significant changes gradually.
We know how strongly you want to get a raise in wages, purchase a fresh car or go around the world. Stop. How much has your income increased?
The joy of seeing the amount on the payroll can cloud decisions and force you to make spontaneous purchases. We talked about the need to defer and the principle of proportionality above. Expending today forces you to cut your next month or even a year’s expenses.
Do not let euphoria and emotions disrupt your financial plan. If such a purchase is unjustified, then do not make it.
Your reserve fund should be so large that the desired significant purchases are almost invisible or quickly replenished.
Consider the possible occurrence of unforeseen circumstances in the future and their impact on your financial situation when making significant transactions. We’ve seen them before: epidemics, military aggression, conflicts, etc.
6. Network with people who have similar goals
Don’t copy other people’s way of life. Don’t try to imitate someone at any cost. It is your life and your money. Solely you are responsible for their use and effectiveness. The opinion of people should not concern you.
Those around you must have the leadership skills to inspire you with perfect economic triumphs.
Achieving this goal may be much easier than pursuing it alone.
Motivation matters. It is an additional resource that is no less important than money to Avoid Lifestyle Inflation.
People who don’t support, criticize or mislead you cannot be considered friends.
Be bold and courageous. Break relationships with those who pull to the bottom and do not contribute to development. The first results should be visible as soon as you change your communication circle.
Befriend positive people who surround themselves with optimism. They support you in your time of necessity.
Find a mentor or coach. He can offer you his knowledge and experience in his professional activities. His example and authority give an impetus to engage in business, new investments, and discover a new profession.
What’s wrong with Lifestyle Inflation?
Do not think Lifestyle Inflation is always evil.
There are cases when spending everything earned or even more will be helpful, applicable, and motivated by objective reasons.
Is there anything good?
Your wardrobe requires upgrades. You ought to spend a big amount of reserves to do it. However, a respected and well-groomed appearance allows getting a promotion at work.
Having a child, maybe not the first, but the second or the third, requires you to improve your living conditions. A further house with additional rooms and developed urban infrastructure seems necessary.
The offer of an unknown prestigious job in another country makes it necessary to buy fresh real estate there, not to pay rent.
It is a reasonable investment to purchase a new gadget if it is a critical work tool.
So don’t think the Lifestyle Inflation is just a danger. Clever management of your finances will maximize the benefits of your gains.
Do not think you should devote all your life to reducing costs and saving. Why then do you work? Earnings should bring joy and inspiration or relieve stress. Give yourself a rest. Travel. Have fun with life. It is an excellent way to reboot. You always require a push to achieve your goals. Pamper yourself and your loved ones. But there should be a measure around.