Are you working towards making the most money possible in the hope that it will give you a better lifestyle? If so, you might want to reconsider (or at least reevaluate your goal) as you might end up stuck because of lifestyle inflation.
So what exactly is ‘lifestyle inflation’? Lifestyle inflation is spending more as you earn more. So despite your earnings going up, you don’t get to feel the effects of the pay rise, as you are spending more – and not necessarily on fun, lifestyle items. It can be the reason why, despite earning a high salary, people find it difficult to save for future events like retirement or an emergency fund. It also leads to people being stuck in the rat race just to pay the bills.
How can you avoid the negative effects of lifestyle inflation? Here’s some tips on getting the most out of your pay rise.
Don’t spend before you know your budget
Once you receive your pay rise, calculate how much after taxes and expenses you have. You might find that it’s less than you thought, especially if the rise pushes you just over the into the new higher tax bracket.
Knowing this gives you the real perspective on what your budget can handle. Can you really afford the new luxury car you’ve had your eye on, as well as saving for retirement?
Are you already happy? Transfer the excess!
Are you happy with your current lifestyle? If you are, rather than finding reasons to spend your extra, save the rest in a different account. You’ll get far more use out of the savings than if you splurge it every month. Maybe save for a luxury holiday, or put it aside for your emergency fund.
Spend on experiences – not things
Getting more money can make you feel more secure and means that you do have a little more to spend on yourself. Buying new things can be fun and give you a small boost but it has been proven that spending on experiences rather than ‘things’ can give you prolonged happiness. Think about signing up to a new course or taking a short break, you’ll feel more satisfied and for far longer.
Make small changes
There is nothing wrong with wanting to improve your lifestyle – in fact it can make working hard worth it. But you should think carefully about how you do it. Make small changes to your life, rather than blowing money fast. Think about what you want most, a new car, home improvements, perhaps a holiday? Then prioritise them and work towards one at a time. It will be more manageable and you are less likely to find that you have taken on more than you can handle.
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