If you are anything like me, your first job after high school or college was not very lucrative. I was like many others who entered the workforce with a lower-than-average salary.
The good news is that most people see their salaries increase over time. This can open up new opportunities.
It often feels like those pay raises disappear just as fast as they appear. It isn’t easy to save money, and we wonder where all the extra money went.
Lifestyle creep: What does it mean?
Lifestyle inflation, also known as lifestyle creep, is the gradual increase of your discretionary spending with an increase in income.
Lifestyle inflation can be intentional. We choose to live better lives as we gain more. Lifestyle creep can happen without our realizing it. We have more money in our bank accounts, so we spend it.
It’s normal to want to improve your lifestyle with a higher income, but it can also cause financial problems. If you live a lifestyle equal to your income, you’re not allocating extra money to your retirement accounts or emergency fund.
Although lifestyle creep can seem harmless, it can lead to serious problems. Recent data shows that about 54% of Americans live paycheck-to-paycheck, including 40% of those with income over $100,000! This means that there is little money left over to meet financial goals or cover financial emergencies.
How to prevent lifestyle inflation?
Lifestyle inflation is something that many people don’t realize. However, there are ways to avoid it. Continue reading to find five ways you can avoid lifestyle creep.
CREATE A BUDGET
It’s a fact that you’ve probably heard: Having a budget is the best way to manage your spending. But it’s worth repeating.
A budget is a way to tell your money where it should go, rather than spending what’s already in your account.
The Budget is one of the best budgets for addressing lifestyle creep. This budget method allows you to allocate 50% of your income towards needs, 30% toward wants, 20% toward savings, and 20% toward debt and debt.
Because you can use the same percentage to divide your Budget, no matter what income you have, this budgeting method easily addresses pay increases. This framework can be used to divide your income if it goes up.
SET FINANCIAL GOALS
Setting goals requires you to have a plan for your money. If I want to pay the down payment for a house in two years, and it costs me $24,000, I will need to save approximately $1,000 each month to achieve that goal.
I won’t spend the $1,000 on unnecessary spending if I am excited to be a homeowner. No, I already have a plan.
I know that I am more motivated to save if I have a goal in mind than if I want to save.
CREATE BOUNDARIES ABROAD DEBT
Lifestyle creeps dangerously when there isn’t enough income to cover it. Unfortunately, this is the case for many.
Some situations are difficult to avoid. In some cases, you may need to borrow money or a credit card to cover a financial emergency. For large purchases such as cars, financing may be the only option.
Credit card debt can often be caused by lifestyle inflation, more common than our income. This is what I know from personal experience. After I divorced my husband at 27, I couldn’t afford my lifestyle anymore, and I ended up with a lot of credit card debt. This was before I started to think seriously about my finances.
Lifestyle creep can be avoided by setting clear boundaries about when and how much debt you will accept.
AUTOMATE SAVINGS
It’s easy to spend more when your income increases because we have more money in the bank. It’s easy to spend when you have the money.
Automating your savings is a great way to get around this problem.
I started saving seriously when I decided to save more. I set up an automatic transfer from my checking to my savings account every month after receiving my monthly paycheck. It was initially $50, but it grew over time.
You know what? That money was not missing from my bank account. It was out there, out of my mind. It wasn’t there for me to spend, so I didn’t feel tempted.
This automatic savings technique can build your emergency fund, save for a big financial goal, and fund your investment accounts.
