Today, we talk about the scariest concept in all of Personal Finance.
If you frighten easy, I would recommend skipping this wretched article...
What's so scary?
The concept I'm referencing of course... is Lifestyle Inflation
. Lifestyle inflation, courtesy of Investopedia
, refers to an increase in spending when an individual's income goes up. In other words, when people start making money, they begin to spend more frivolously, mistaking wants
You don't scare me!
What's so scary about spending money if you have money to spend? To illustrate why lifestyle inflation is so detrimental, I'd like to start with a quote that you may be familiar with.
"The difficult thing in life is not making it, it's keeping it."
- Attributed to John McAfee
In plain terms, anybody can catch a break and fall into some money, but it takes intelligence and integrity to keep that money around for years to come. Why do you think that so many lottery winners end up losing everything? They quickly get hiked up to an income level they could've never imagined, and even quicker, they develop unsustainable spending habits, throwing all of their money at shiny things.
It's true for many people who come into mass amounts of wealth quickly. There are endless examples of athletes signed to multi-million dollar contracts who end up losing it all, inevitably having to work a 9-5 instead of rightfully enjoying early retirement. Lifestyle inflation is a cruel mistress...
Ok, I'm scared.
Don't be! Here are 3 ways you can combat lifestyle inflation as your coin purse gets heavier.
Be aware that lifestyle inflation is a disease that creeps up on many people. Make conscious purchases, asking yourself whether this INSERT ITEM HERE
is something you would have purchased 5 years prior. Maintaining a strong budget and regularly monitoring your spending habits are also good ways to minimize holes in your checkbook.
Try not to equate success with shiny things. If you must spend, do so on experiences rather than material possessions. New purchases may put a smile on your face for a short time, but an experience such as a family vacation or investing in a new skill can lead to years of enjoyment or stories to recall upon.
Make relatable friends.
Keep people around you with similar spending habits. Find friends who have comparable budgeting practices or financial goals to avoid the social pressure of overspending. Keeping up with the Joneses is a dangerous game.