The key to making personal finance work is spending less than you earn. A lot on this blog, and a lot of advice out there focuses a lot on the spending less part. You may have noticed that I even phrased the first sentence as “spending less than you earn”, rather than “earning more than you spend”.
There’s a reason for focusing on cutting your expenses. Often cutting your spending is far easier than increasing your income- even though you might not realize it right away. Spending less usually leaves you happier than a larger income, because it leaves you with a less cluttered and simpler life.
Keeping your spending in check fights a concept known as “lifestyle inflation”. Lifestyle inflation occurs when you start spending more with every raise or increase in income. Lifestyle inflation is all to common, and often occurs without you realizing. Your lifestyle adjusts to your new income so fast that before long, you can’t imagine living on your former income.
So what’s so bad about lifestyle inflation? If you’re contributing enough to retirement plans, have secure emergency funds, and are still spending less than the remainder of your earnings, then there’s nothing particularly wrong with lifestyle inflation in itself. However, usually lifestyle inflation is rooted in the belief that more ‘stuff’ and more spending is going to bring happiness or meaning to life. This never works. Usually all you’re getting is the short term high of actually purchasing the stuff and the long term headache of clutter.
Budgeting out Lifestyle Inflation
If you have a budget in place, its much easier to avoid lifestyle inflation. A budget gives you defined spending guidelines that you can choose to leave unchanged in the event of a raise or other extra income. This allows you to either redirect the extra income to your long term goals. You can also choose to invest this extra income in something you’re passionate about, such as a hobby or non-profit work. If you’re really at a loss for what to do with your extra money (good problem!), you can always reinvest it for passive income.
Not falling into the lifestyle inflation trap keeps your finances more resilient in the case of an income drop. Of course, when you just got a raise or a new job, the last thing you want to think about is a job loss or unexpected expenses, but these things also happen in life. If you’ve been redirecting your extra income to a hobby, extra savings, or better yet, passive income, you’ll be much more prepared for any negative life events that come along.
While budgeting is a great tool to prevent lifestyle inflation, changing your mindset about spending is just important. Ask yourself every time you think about spending money, whether the expense will actually benefit you. If you’re honest with yourself, you’ll likely save yourself from buying yet another gadget that would just end up sitting in a drawer.
Of course, not all spending is bad. If an income increase allows you to go out for coffee with a friend more often, great! That is, assuming that you actually enjoy going out for coffee with that friend. If that extra money allows you to budget a little more for vehicles, meaning you’ll be making fewer trips to the mechanic, that’s likely going to improve your life. So don’t feel like you have to live a bare bones existence. Just make sure that your spending actually makes sense.
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- While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.