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What is lifestyle inflation – and how do you beat it?

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You’ve worked hard and got yourself a promotion or raise – congratulations! However, if you’re not careful, lifestyle inflation can sneak up on you and destroy any gains to your bank account.

More money, more temptation

Lifestyle inflation is when your standard of living improves as your income increases. After all, it’s only fair to reward yourself for all the extra effort you’ve been putting in at work, right?

This is not necessarily a bad thing in itself. But, the problem comes when this type of thinking leads to overspending. Life’s little luxuries become the norm and, before you know it, you’re back living from paycheque to paycheque – despite earning more. 

How lifestyle inflation can make you go backwards

There’s a saying that it’s not your salary that makes you rich, it’s your spending habits. So while it’s normal for a little bit of lifestyle inflation to creep in as you progress up the job ladder, be careful that it doesn’t derail your finances altogether.

For example, imagine that you changed jobs and are now taking home an extra $12,000 a year. Not bad … until your spending starts rising too:

  • Getting a new car = extra $500/month
  • Eating out more often = extra $250/month
  • Buying new clothes and other treats = extra $100/month
  • Upgrading your phone to a newer model = extra $100/month
  • Taking an Uber rather than walking = extra $100/month
  • Drinking take-away coffee = extra $50/month  
  • TOTAL = extra $1100/month or $13,200/year

So even though your financial situation has improved on paper, in reality you’re worse off than when you earned less. 

How to avoid the trap of lifestyle inflation

Luckily there are some simple steps you can take to stop lifestyle inflation creeping up on you:

Track your spending

While you might have a good idea of what your big monthly bills are, it’s easy to lose track of smaller expenses like meals out, new clothes and takeaway coffee. However, these small expenses can quickly add up – especially if they become a regular habit. Take control of your finances by tracking all your spending in a spreadsheet, budgeting app or old-fashioned pen and paper.

Limit impulse purchases

Everyone deserves a treat now and then. But impulse buying often leads to purchasing items you don’t need or really want.

Set financial goals

Setting financial goals helps you stay focused on what you want to achieve – whether that’s paying off your mortgage ahead of time, buying an investment property or having a comfortable retirement.

Don’t take on unnecessary new debt

The extra money you’re bringing home each month can be quickly wiped out when you take on extra debt. So while it can be tempting to make major lifestyle upgrades when you get a pay rise, consider if they are really necessary first.

Deposit most of your raise in your savings account or make additional super contributions

The best way of preventing lifestyle inflation is to boost your savings as soon as your income increases. You won’t notice the difference and there will be no temptation to spend the money.

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