As our income increases, we tend to spend more. We get a raise at work; we move to a bigger apartment or buy a new car. This is what is known as Lifestyle Inflation. Though the temptation to spend is very difficult to resist, it is important to be mindful of how we spend our income so as to avoid getting stuck in the rat race of working just to pay the bills. Here are few ways to control our finances in order to curb lifestyle inflation.
Know the difference between wants and needs: Not everything we want is a need. Usage of mobile phones, cars or many other electronic gadgets used to be a thing of luxury a few years back but has become a necessity nowadays. But, we can clearly cut our expenses on these to focus on our long-term goals.
Tracking spending habits: We tend to spend a lot on frivolous things not realizing how much money that could have been saved, had we been watchful at the right time. Instead of focusing solely on how much money we are earning, we have to look at what we are spending that money on. So it is advisable to review the monthly statements and transactions to prioritize and allocate the money on right things.
Budgeting as a habit: Having a spending plan can keep our goals intact. There’s nothing wrong with keeping a journal and writing down all the stuff we spend money on, throughout the day. It also provides a clear picture as to know much money can be saved at the end of the month.
Avoiding new debts: Even if there’s a rise in income, debts only make our budget thinner. Instead of paying higher interest rates, we should pay off debts that we currently have, starting with the smallest. When everything is paid off, we can open savings accounts for things we eventually wanted. This can also help us pay a larger down payment and often get a lower interest rate.
Hanging out with friends with similar budgets: If our friends live an inflated lifestyle, we try to match up to their behavior and may end up spending more. On the other hand, if our friends live more modestly, we may not be enticed to spend more. The same could be for cars, houses and other possessions. If our friends are more successful than we are, we may feel the urge to push our budget.
Saving raises by maintaining current lifestyle: Lead the simple life! To avoid lifestyle inflation, we can keep living how we had been living before the extra money came in; before everything became extravagant and overly pompous. This can help us to save the extra money to pay off debts or achieve long-term financial goals.
Though it is difficult to avoid the trap of maintaining a luxurious lifestyle, striving to achieve long-term financial goals is the key. Even though we might be able to pay our bills, we cannot limit our ability to build wealth. So instead of forgetting our long-term goals, we should start making plans to achieve them.