Does the idea of receiving a promotion make your head swim with dollar signs? If you’re climbing the corporate ladder, congratulations! But don’t hit checkout on your online shopping cart just yet.
Lifestyle inflation can sneak into the minds of those with newfound wealth and cloud your financial judgment. Today we’re covering three tips to help you avoid lifestyle inflation as your career grows.
What Is Lifestyle Inflation?
Unfortunately, peer pressure doesn’t go away as you age. Have you heard of keeping up with the Joneses? A great example is the green monster of envy and the subconscious pressure to put in an in-ground pool in your backyard just because your neighbors did.
That (mythical) green monster is lifestyle inflation’s best friend. Lifestyle inflation (or lifestyle creep) is when your living expenses and non-essential costs grow as your income grows.
Lifestyle inflation can also manifest in simple ways like eating at a restaurant one extra time per week, buying a membership to a desirable golf course, or purchasing an additional streaming service to watch all the shows you didn’t have access to before.
Why Is Lifestyle Inflation Harmful?
There’s nothing wrong with enjoying your money. We’re not trying to squash your dream of having a new pool. In fact, as your career grows, we fully expect that your lifestyle will change accordingly. Working hard and not enjoying the fruits of your labor can lead to long-term burnout and other problematic spending habits – we want to avoid that!
The trick is to ensure that as your lifestyle changes and your career takes off, you don’t find yourself living and spending beyond your means or outside of your values.
Lifestyle inflation can become detrimental to your financial life when it begins to cut into your savings efforts, like retirement funds, emergency funds, other investments, etc.
How do you know if you’re creeping in that direction? An internal alarm should sound if you find yourself thinking the following:
- How did I ever make less money than I do now?
- How did we ever live with less money than we have now?
3 Ways You Can Lifestyle Inflation
If you spend all your money on “wants,” you can lose sight of your financial priorities. Ultimately, this could lead to a complete derailment of your financial plan. So, how do you avoid the effects of lifestyle inflation?
Return To Your Values
The #1 way to avoid lifestyle inflation is to return to your values and financial goals. We like to do this at AVID Planning through our Purpose-Driven Money System. It asks, how can you make your money work for you?
By focusing on the bigger picture, you can concentrate on reaching your financial goals and spend money and time in areas that give your life meaning.
Pay Yourself First
You and your financial priorities should get first “dibs” on any newfound funds.
Ask yourself where you stand on your financial goals:
- Do I have debt that needs to be paid off?
- Am I contributing the maximum amount to my retirement savings?
- Do I need to complete or bump up my emergency fund?
- Do I want to open a college savings plan to pay for my child’s education?
Once you’ve tackled your financial priorities, you can explore ways to use your new funds to better your lifestyle. Your values also play a part here!
If you value quality family time, putting in a new pool at your home may make sense. Or, you could save for a family vacation.
If you value education, you could use the funds to further your education or save for your child’s education.
If you value community or philanthropy, you could use funds for charitable giving. The options are endless!
Practice Intentional Spending
Intentional spending, utilizing your money to benefit your short and long-term financial goals, is a great way to balance “needs” and “wants.” If you find the balance, you can not only save for retirement and your children’s college education but also save for a family vacation, too.
“Status-spending” (keeping up with the Joneses) likely isn’t aligned with your values. Just because you think an upper-level manager should dress a certain way or drive a particular vehicle doesn’t mean you must follow suit.
Other Considerations With Newfound Funds
There are other things you need to be aware of if you have an influx of income. First, know that you may not see the entirety of your raise, stock gains, etc., so don’t make income plans that you might not end up with.
Before you plan for your new funds, look at your pay stub. It’ll help you see how much income you’re getting vs. what’s automatically going to your retirement savings, healthcare premiums, state and local taxes, etc.
Speaking of taxes, check to see if your professional growth has bumped you into a higher tax bracket. If this is the case, ensure you account for a higher tax bill or work with your advisor to consider other solutions like tax-loss harvesting, income deferral, etc.
Your values and financial goals should ultimately guide your use of your wealth. If you’re unsure of where to start, we can help! Our Purpose-Driven Money System can help you identify your values and financial priorities, giving you a roadmap for how to make your money work for you.
Please set up a call, or stop by our office in St. Petersburg, FL, today if you’re ready to get started.