I never made a conscious decision to keep expenses at roughly the same level. When my wife and I bought our first car, we chose a payment that wouldn’t be a hardship. With our first house, we negotiated for the best interest rate possible while trying to pay no more than we’d paid for our last apartment. Weirdly, these events set the guardrails that we are still living under 20 years later. We like a car payment that’s a certain amount, even though new cars now average almost $40,000. Similarly, we like having a house payment in the lower teens – usually around $1,100-1,200 a month. Even though we never meant to, we haven’t succumbed to lifestyle inflation.
What is lifestyle inflation?
Lifestyle inflation is the act of increasing your spending when you make more money. Let’s say you get a raise at work. While your first apartment has been more than adequate, your friends live in a gated community with two pools and tennis courts. Now you can too. So you rent a one-bedroom for an extra $300 per month, which eats up your raise.
You might be thinking – I deserve that. If you’re moving from a dangerous neighborhood or unsafe apartment, that reasoning might ring true. But just to have a pool? Can’t you visit your friends when you want to take a dip?
The problem isn’t necessarily the first move or the first new car; it’s the belief that you deserve more because you’re making more. So the next time you earn a windfall or a raise – or move into a new job – you do the same thing, never really paying down your credit cards or investing more for retirement. 20 years later, you might look back and see a lot of things you bought, but no real advance in your net worth. You may discover that all the things you purchased didn’t really make you any happier. And you could still be living paycheck to paycheck, just like you were when you were living in that first apartment.
Avoid the creep
One thing that has amazed me every time I get a raise is how little it amounts to when you divide it by 12. I’ve had $15,000 raises and thousands in bonuses, and after taxes it often amounts to hundreds per month, not the thousands I’d daydreamed about.
Do the math. After being disappointed several times, I started to figure out what the raise/new job actually meant to me on a monthly basis instead of letting my mind wander about what I could do with the money. To do this, take a look at a recent pay stub to figure the rough percentage of your pay that you’re losing to taxes. In other words, if you’re making $6,000 gross and bringing home $4,400, you’re paying approximately 27% in taxes, Medicare, and Social Security. If you receive a $5,000 raise, multiply it by .73 to see what it might be after taxes, then divide by 12. Your $5k raise ends up being a little over $300 per month.
What really makes you happy? Many people have transitioned from a more stuff to a more experiences mindset. Would living in the apartment with the pool make you happier, or would spending more time with your friends at the pool make you happier? Could you occasionally spend $50 to bring pizza and beer when you visit versus $300 per month to live there?
Check your finances. How are the credit card bills? Are you paying them in full each month? Are you maxing out your 401k contributions or at the very least contributing enough for the full company match? Do you have an emergency savings fund set up? If there are holes in your finances, consider using some of your newfound wealth to fill them.
Don’t forget your goals. Everyone feels a rush from successfully negotiating for a raise or finding a job that moves you up an income bracket. It’s easy to let it go to your head. But let it sit for a while – take some time to move past the euphoria and remember what’s important to you. Maybe a new apartment isn’t your goal; maybe it’s a small cottage in the trendy part of town. Would moving to a more expensive place help you achieve your ultimate goal?
When spending more may make sense
I mentioned before moving to a safer area could be a good use of your new income. Here are some others.
Your needs change. Maybe your higher income came with a more professional job where you’ll need to dress differently. Or perhaps you’re having a baby and you need to set up a nursery.
You’re investing. Increasing your investments in your retirement plan could be a good use of your income. Investing in yourself might also pay off in the future. Taking classes or earning a degree/certification may provide even more income in the future.
Long-term goal now doable. Perhaps this was the raise you needed to afford the mortgage for that cute cottage in the city.
Retirement
This may sound crazy, and I’m certainly not suggesting anyone expects their budget at 25 to be their budget in retirement. But as I’ve started focusing on the next stage of life, I’ve seen that curtailing our spending and being happy living under a relatively consistent budget has opened avenues to an earlier retirement than I dreamed of. We spend less than half of our gross pay every month. Instead of having to set my retirement goal at 80% to 120% of my last year’s salary, I can rest assured that we will be happy with less.
Celebrate
You should definitely celebrate your raise or new job. A fancy dinner out, maybe a new outfit, or a weekend trip to the beach could be on the agenda. But after the celebration take the time to figure out what you really need to do with your money.
It’s sometimes too easy to spend now and worry later. People post their best lives on social media. Maybe your friend showed up at the Friday night happy hour in a new BMW. Don’t let yourself fall into the habit of trying to keep up with others. Determine what you want and work toward those goals that fulfill you.
Photo by freestocks