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Control Lifestyle Inflation Before it Controls You.

by J. Money on Tuesday, July 7, 2009

Lifestyle Inflation*****************************************************************
This is a guest article from video blogger Vik Tantry. He runs the personal finance site Kanjoh.com, and has some pretty wicked videos uploaded there – I highly recommend checking them out. A fun (and different) way to learn!
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It is fascinating how our tastes change. Back in college, I used to happily eat cereal and Ramen Noodles three meals a day. Once I graduated, I was actually able to afford real meals at fancy restaurants. I was earning more, and my spending had increased substantially. This is lifestyle inflation: when your spending starts to catch up with your income.

Lifestyle inflation is dangerous because it can decimate our savings, and it is encouraged by our consumer-driven society. Saving isn’t sexy, but it is always exciting to buy the next fancy gadget. When our income goes up, it is very easy to spend it all quickly on things that “we’ve wanted for a long time but never could afford.” Lifestyle inflation often creeps into our lives slowly and steadily. We start eating out a little more, and spending more on clothes. We take fancier vacations and buy more expensive cars and furniture. Before you know it, our increase in income isn’t covering our increased costs!

After a few months of working, I realized that I was not saving nearly as much as I would have liked. I also realized that my “improved lifestyle” did not make me substantially happier than when I was in college. I tallied up my expenses and identified several areas of spending that I could do without. I realized that I didn’t need to buy new clothes and shoes so often, and I could go out to dinner a little less. After all, I didn’t need these things back in college, so why would I need them now?

When faced with lifestyle inflation, take a few days to adjust. Consider your increase in income first and foremost as an opportunity to save more. Then, take a few hours to sit down and prioritize. Make a list of things you’ve wanted and figure out which ones really mean the most to you. Once you have defined your priorities, stick to them. This way, you can save and invest while still spending money on the things that are truly important.

Controlling lifestyle inflation is more about having the right values than anything else. However, its important to not take it to the other extreme. A balanced approach to saving and spending will maximize both your happiness and your financial stability.

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Editor’s Note: One of the best ways to avoid falling in this trap is to up your 401(k) or savings whenever you get a raise or promotion! Getting in this habit will not only help you save more over time, but you’ll never miss any of it because you’ll never see it ;)


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