Lifestyle inflation is what happens when you spend more as you earn more. It isn’t necessarily a bad thing, especially if you can maintain a healthy balance between spending, saving, and investing.
However, keeping your daily costs low can be the way to go if you want to avoid overspending. This can allow you to optimize your saving and investing potential to help you reach your money goals faster.
Here are 5 ways to keep your spending in check and avoid lifestyle inflation.
1. Review your expenses
Identify areas where you may be spending a lot or even possibly wasting money on things that don’t add much value to your life.
You can do this by setting a budget and tracking your expenses so you can assess your spending patterns. To stay in control, make time for a regular financial check-up, like every month, week, or payday.
Use this time to review recurring expenses, non-essential costs, and your progress toward saving or investing goals.
2. Trim the excess
You may find room for improvement after reviewing your spending. Here are the questions to ask to help you identify expenses you can trim:
- Are there big expenses you can adjust?
Luxuries are often the first to go when people want to cut down on spending. However, you should also look at your needs since they tend to take a bigger chunk of your budget.
There may be room to simplify your lifestyle like downsizing your living space, choosing cheaper means of transportation, or cooking your meals instead of dining out.
- Are you properly budgeting for wants?
Lowering your living expenses doesn’t mean you have to say goodbye to the things you want or enjoy. You can make space in your budget for your wants if these luxuries won’t keep you from meeting your financial goals.
With a bit of creativity and flexibility, you may also find budget-friendly alternatives for entertainment and hobbies, like free events and outdoor activities.
It also helps to know when to buy cheap and when to spend a little more so you can manage costs without sacrificing quality.
3. Make a plan for salary increases
When you get a raise, plan how you’ll allocate the extra money. This way, you won’t end up spending everything and unintentionally develop an expensive lifestyle.
It’s best to pay off any high-interest debt first so such payments won’t eat into your earnings. If you have zero or manageable debt, the next things to prioritize are your savings and investments.
If you don’t have an emergency fund yet, aim to build one with at least 3 to 6 months' worth of living expenses. With these obligations taken care of, you can start investing to possibly grow your money over the long term.
4. Avoid the trap of comparison
The lifestyle you want may not happen overnight and could instead require years of discipline to achieve.
This delayed gratification can be difficult to accept when you’re constantly exposed to other people’s lifestyles and feel the urge to match them.
It can be easier on your mental wellbeing – and wallet – if you stop measuring your life against the standards set by others.
Instead, you can focus on your own goals and achieve the peace of mind that comes with living a financially responsible life.
5. Recalibrate every year
Make sure to review the year that was and plan for the year ahead. Use this time to tweak your budget to adjust for inflation, any salary increase, new financial responsibilities and even milestones in life.
Similarly, you should also adjust your emergency fund based on the variables above so it can continue to meet your needs through the years.
The budget you allocate for expenses, savings and investments should also grow together with your income for you to avoid falling victim to lifestyle inflation.
