You’ve been burning the midnight oil to get a salary hike. And after months of hard labour, it’s finally been awarded to you. So how do you celebrate? Do you splurge on a new wardrobe, or maybe you prefer to shift to a posher locality… Perhaps it’s your car that needs to be upgraded. It’s perfectly natural to want to improve your lifestyle – after all, that’s the whole point of earning well.
But then, what happens to your savings plan? Does it get a boost as well, or do you end up saving the same, or worse, lesser.
Say hello to ‘Lifestyle Inflation’ – A potential threat to the nest egg you’ve been working so hard to create. Lifestyle inflation refers to the trend where typically the monthly expenses rise when a person’s earnings go up. Financial experts say that the psychology behind lifestyle inflation could either be ‘entitlement’ – where the person believes he’s worked hard for it so he’s earned the right to splurge, or ‘keeping up with the Joneses’ – where the person wants to live as lavishly as his rich friends.
[Related: Stop dipping into your savings]
While rewarding yourself is certainly not a bad thing, if spending gets out of hand, lifestyle inflation can be detrimental to your financial health in the future. As expenses increase bit by bit, your ability to build wealth is lowered.
To avoid this, it’s best to pick up on the early signs of lifestyle inflation and nip it in the bud. Here are five simple strategies to make all your hard work count:
#Prioritize your financial goals
People who already have some money saved often fall into the trap of treating extra income as ‘fun money’. Before they know it, all the difference in the pay they get goes into shopping, traveling and fine dining instead of saving. A smarter move would be to put the bonus money into achieving financial goals faster or paying out your debts sooner. Consider placing increased contributions towards your loan payments on the top of the list when planning your expenses.
#Restructure your budget
Now that your income is more, sit down and restructure your monthly budget. Push yourself and boost the money you channel towards long-term savings and your retirement fund every month.
#Automate how you save
Take away the temptation to spend by immediately diverting your extra income into a high-yield savings account or a sound investment. You can do a one-time setup and automate the entire process so that you are not at risk of forgetting.
Your friend owns a Porsche. That doesn’t mean you need a super luxury car as well. It’s not necessary to keep up with your friends’ lifestyle. Remember, their goals could be much different from yours. Living within your means is the true road to financial stability.
#Budget your rewards
It would be unrealistic to say that you shouldn’t treat yourself at all. What helps though, is that instead of spending impulsively, you plan out what you want to splurge on, and allocate a portion of your resources to it.