Lifestyle inflation happens when your spending increases as your income rises.

If you are living within your means your income is greater than your expenses, meaning after you have paid all your bills you still have money left over which leads to greater financial security. When your salary increases it’s important to stay mindful of your spending habits and make wise financial decisions.

Some examples of lifestyle inflation are.

• Your income has increased, but the amount you are saving has not
• You live paycheck to paycheck
• You don’t make enough money to cover your monthly bills
• You use money from savings to cover monthly expenses
• You accumulate debt
• You purchase unnecessary items

Here are some ways to prevent lifestyle inflation.

Create a budget

Start by creating a budget which is a plan that helps you manage your money. It shows you how much money you bring in and how much you spend and save each month which can help you avoid problems like overspending and debt. The budget should include your total monthly income and all your monthly expenses.

Have clear financial goals

Having short- and long-term financial goals keeps you grounded and balanced and leads to financial stability. Building an emergency fund, paying off debt, saving for a home or car, funding investment accounts are all goals that serve as a reminder of what’s important and helps you stay focused.

Live below your means

When you spend less money than you earn each month, you are living below your means.

A Pew Research study showed that less than 46% of respondents surveyed reported making more than they spend.

https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/03/how-income-volatility-interacts-with-american-families-financial-security

Spending less than you earn will put you on a path to financial success. Tips for Living Below Your Means

Pay yourself first

Paying yourself first means you treat savings and investing just like any other monthly expense. When you get paid you deposit a percentage of your pay into a savings or investment account.

Setup an emergency fund

Setup an emergency fund that can cover 3-6 months of expenses. Having an emergency fund gives you a way to pay for unplanned expenses without going into debt. What is an Emergency Fund?

Don’t feel like you need to keep up

Don’t feel like you need to keep up with others financially. Remember many people who appear to have the best of everything are drowning in debt.

Increase your savings with each salary increase

When your salary increases contribute more to your savings. Automate your finances so that money is transferred to a high-interest savings account, retirement fund, or investment account. By doing this, you won’t be tempted to spend the money or forget to make a deposit.

Consider recurring expenses

As your salary increases you may be tempted to add to your recurring expenses by purchasing additional streaming services, taking on a new car loan, or adding gym or fitness club memberships. If you have been comfortably living with what you have consider keeping your lifestyle the same.

Spend mindfully

Be intentionally with your money, consider every purchase you make. Ask yourself do I need this? Is this something I can live without? Anytime you are considering buying something new wait 48 hours, often you will find that after that time has passed you are no longer tempted to make the purchase. Prioritize needs over wants by differentiating between necessary and unnecessary purchases. Set spending restrictions on categories such as groceries, entertainment, and dining out.

Choose experiences over possessions

Select experiences over possessions by putting things like travel, hobbies, and quality time with friends and family over material possessions.

It’s ok to splurge in moderation

Avoiding lifestyle inflation doesn’t mean depriving yourself entirely. It’s important to celebrate your hard work and success, if you receive a raise go ahead and buy something you want but don’t make it an ongoing expense that will add to your monthly bills or increase debt. Instead make a smaller purchase, maybe a weekend trip instead of an overseas vacation or a dinner out and a movie instead of adding more streaming services and meal delivery subscriptions.

Focus on the future

All of us look forward to a comfortable retirement and the best path toward that is to save while you are actively working. If you increase your spending with each raise in salary, you may be left without significant retirement savings.