For my entire career, I have had a monthly automatic savings order that I regularly increase (“pay yourself first”) rather than spend (no “lifestyle inflation”). This has allowed me to significantly increase my savings rate, which is the percentage I save relative to my net income.
What is lifestyle inflation?
Lifestyle inflation, simply put, is spending more when you earn more during your career. Lifestyle inflation is more likely to occur when someone gets a raise (or additional unexpected income) and lifestyle inflation makes it harder to step out of the “rat race” (living from paycheck to paycheck).
Here are 5 tips to avoid lifestyle inflation.
Tip 1 : housing
When you earn more, you tend to live bigger. With a higher income, you can get a bigger loan from the bank. Don’t fall into that trap, you are not obliged to borrow the maximum amount ;-).
Did you know that Warren Buffett still lives in the same middle-class house he bought in 1958? By the way, he also drives a regular middle-class used car.
Tip 2 : car
It is best to buy a car second-hand and pay cash. When you buy a new car, its value has already decreased after the first day.
I have always driven a small used car, and I am glad I never bought a (new) expensive car.
Tip 3 : pay yourself first
Using the “pay yourself first” technique you literally pay yourself first, and you can prevent yourself from spending all your money. Most banks allow you to set up an automatic savings transfer and here you instruct the bank to automatically transfer an amount to your savings account each month. The best timing for this automatic savings order is just after your income comes in.
If you get a pay raise during your career, increase your automatic savings transfer and don’t spend this money.
Tip 4 : don’t try to impress others
“Keeping up with the Joneses“, an expression from the United States, refers to comparing your status with that of others. For example, Mr. and Mrs. Jones live in a big villa, drive luxury cars, have more expensive clothes than they can wear, buy the latest smartphone every year, and so on. There is no point in comparing with others. Decide for yourself what is important.
I can’t express it better with the quote from Will Rogers.
Too many people spend money they haven’t earned, to buy things they don’t want, to impress people that they don’t like.
Will Rogers
Tip 5 : experiences instead of stuff
With every purchase, ask yourself the question : do I really need this? Avoid impulse purchases, especially for things you don’t really need.
We were never meant to live life accumulating stuff. We were meant to live simply enjoying the experiences of life, the people of life, and the journey of life – not the things of life.
Joshua Becker
You can also enjoy experiences without spending a lot of money, for example, a walk in the park, a trip with a tent, a free festival, and so on.
The trick is to build up equity, by saving and investing, while enjoying the moment.
This info is for informational, educational and entertainment purposes only, and does not constitute financial, accounting, or legal advice. Please do your own research (disclaimer).