I remember when I got my first full-time salary. It felt like a lot of money!
Having all that extra money sitting in my chequing account felt good.
For the first little while, I was happy enough to let it sit there. But then, I was in my early 20’s and lived across from a mall at the time.
I no longer felt that I had to worry about spending money on clothes or makeup. After all, I was trying to work my way up the corporate ladder, I had to dress the part.
I had worked for my CPA designation, my master’s, and my corporate job. Part of me also felt like I should reward myself. At the same time, my friends were also progressing in their careers, so we would eat out at more expensive restaurants, plan weekend trips, or spend money on “experiences” – because we are millennials after all.
Thankfully, around this time, I also discovered my love for investing and the stock market. Which meant that I knew that my money could be put to other uses. But falling into a trap of spending more, was easy!
Getting takeout daily, going on multiple Starbucks runs (for the stars of course), jetting off to different cities on weekends, were all a possibility now! It made me feel like a real adult!
That was my first real brush-up with lifestyle inflation. Thankfully, it didn’t last long. But I know that for many, it’s easy to get caught up in the world of buying more, and spending more, just because you can afford it. And before you know it, the spending can get out of hand.
What is lifestyle inflation
Lifestyle inflation is the idea that your spending increases when your income increases.
Over time, this additional spending can eat into any increase in income.
At the end of the day, you might be left with no additional funds than you had before your pay raise.
Worse yet, you might be spending more than the increase you earned, and that you are actually worse off, than you were before the pay raise!
Typically the triggers for lifestyle inflation are promotions or new jobs, with salary increases.
You should definitely celebrate your successes, but also be mindful if you continue to spend more, and it is getting in the way of your financial goals.
Tips to avoid lifestyle inflation
Revaluate your financial goals and plans
A pay raise is a perfect time to evaluate your financial goals, and plans.
Does your emergency fund need a little bump?
Maybe that pay raise can help you pay down your credit card debt faster. Or maybe your goals were to be mortgage-free by 40, and the additional income can help you reach your goals faster!
Review your budget – or maybe you need to change the way your money because of the change in your financial situation. This easy budgeting technique I use might just help you!
Whatever your goals are, re-evaluate them to see if you need to add new goals, or if your strategy to achieve your goals has changed!
Have a plan for the extra
When you get a raise, determine how much more money you would have in your bank account. The actual funds that would hit your bank account, after accounting for taxes.
Then create a plan for the extra.
Will the excess be saved, invested? Will be it be used to pay down debt, or will you purchase something?
Maybe you always wanted to be able to help others, but couldn’t afford to – that might be part of your new plan now!
Having that plan will ensure that you know exactly where the additional income is going, rather than a rabbit hole of retail therapy, travel, and extra takeout.
Continue to Save / Invest – Invest More if you can
If you were able to save (and invest) for the long term before the increased income, now is the time to supercharge that!
You might have more money available to you every pay day now. That doesn’t mean that you need less of an emergency fund, or less money saved up! Keep up those financial habits.
Be careful with more debt
An increase in your income might help you qualify for a bigger mortgage, or a better car, than you might need.
Additional debt comes with additional monthly obligations for payments, and there might even be additional spending as a result of your purchases.
Be mindful of how these additional debts will help or hinder your lifestyle.
Maybe a larger home is what you need to grow your family. Or maybe you don’t actually need the space of a bigger home. That will depend on you.
Spend on what you really want or need
Of course, I love my coffee runs, Sephora purchases, and late-night Amazon clicks. But I’ve learned to spend more on the things that I actually like! I’m not much of an advocate for giving up the things want or need.
Maybe you can now take that photography course you’ve always wanted to, or have someone clean your home so you can be less stressed.
Be mindful of how you spend your newfound money. Spend on the things you need and value. Leave the rest in the carts.
Don’t buy something, just because you can
Keep a tab on your spending.
It’s tempting to eat out more, or buy more makeup than you need, just because you have more than enough in your chequing account. Or more money to pay your credit card at the end of the month.
Try to not fall for impulse purchases. Those additional coffee trips, travel, or retail therapy, can really add up!
Keep up with your good money habits
As you go through life and have periods of higher income, remember the discipline you developed early in your life. All those frugal college student habits, don’t let that go now, just because you can. Unless it is truly making your life better!
Spend on what makes your life better
If using your raise or bonus brings you joy or closer to your life goals, that is the best use of it! Don’t feel the pressure to spend money because you have it.
Having a plan for salary raises and additional income can help you avoid the trap. Investing more is always a great option, in my opinion!