Mo’ Money, Mo’ Problems: Fight Lifestyle Inflation
It’s a rule of life: the more you make, the more you spend. And that’s totally fine! You’ve earned your bigger paycheck, and so, you have more money at your disposal, to use as you see fit. However, the problem starts when no matter how big your paycheck gets, you don’t make any progress towards your financial goals, like saving for retirement or paying down debt, because you’re spending it on things that you shouldn’t be prioritizing.
“People tend to increase their spending each time their income increases, because they believe that the additional goods and services they are purchasing will make them happier,” Investopedia says.
There’s a term for this increased spending: it’s called lifestyle inflation. Your spending catches up with your paycheck, and might even go beyond it. While before a P500 meal was a once-a-week thing, you now spend that much on food every day. Or maybe instead of paying P5,000 a month in rent, you immediately move to a nicer place where you pay P10,000 once your new paycheck comes in. So instead of the extra money helping you achieve your financial goals, you end up in the same place you were before you got your increase, except now you have nicer things.
Let’s get one thing straight, though: you don’t have to feel guilty about ALL your increased spending. You should reward yourself for your hard work by using your extra money to indulge in life’s little pleasures — but it shouldn’t be at the expense of your financial security. Fight lifestyle inflation and enjoy the most out of your increasing income while still making good financial decisions with these steps:
1. Pay down debt.
Let’s say you left your job that paid P15,000 a month for one that paid P25,000. Now you have an extra P10,000 a month that you didn’t have before. (For the sake of providing nice, round numbers, we won’t be taking taxes into effect.) Before you blow it on a shopping spree, consider using a chunk of that extra money to pay down your debt faster. This means you get to use less of your extra money for yourself, but think of it this way: the faster your debt goes away, the more money you’ll have left over for whatever you want to spend it on.
2. Increase your saving.
If you don’t have debt, consider putting some of that extra P10,000 towards savings. (If you do have debt, balance debt payments and savings.) We’re not saying you should put it ALL in savings — you deserve to enjoy your bigger paycheck — but increase your saving proportionally. If you were saving 20% of your P15,000 salary (P3,000), save 20% of your P25,000 (P5,000). That still leaves you with P5,000 extra every month so you can go on nights out or buy some nice clothes while you use the other P5,000 to build up your emergency fund, put money towards retirement, or save up for that holiday you’ve always wanted. A good rule of thumb is to save 50% of your new extra income, and you can spend that other 50% on whatever you want, guilt-free.
3. Don’t suddenly take on big (and expensive) life changes.
A lot of people think that once they start getting larger paychecks, they can suddenly afford to get a new apartment with higher rent, take a car loan with monthly payments, or other big-ticket expenses. David Blaylock, a CFP with LearnVest Planning Services, says: “People need to be cautious with raises and long-term changes. If you want to eat out a little extra, that’s fine. But if you want to take on a [higher] car payment, that’s a whole other thing that you need to carefully consider—and budget for, regardless of your income.” If you feel ready to make big life changes, do them after making sure that you can truly afford them. Improve your lifestyle gradually, not all at once.
4. Keep things in perspective.
Your first instinct when you get a big raise might be to splurge. But keep your financial goals foremost in your mind, and make your decisions based on them. If you stay focused on your goals, you’ll be more equipped to fight lifestyle inflation.
A bigger paycheck will help you enjoy a better lifestyle. But always be conscious of lifestyle inflation, and learn how to fight it. Put some of that extra money towards your long-term goals, so you can better take advantage of your greater income, not just now, but for the years ahead.