Many of us can think back to a time when the idea of making a steady salary and having “nice things” was a bit of a pipe dream. After my husband and I were married, he was working two jobs while we lived in a tiny basement apartment, shared a car, and ate a lot of ramen noodles. It was difficult to ever imagine anything different – we thought we’d be in that apartment forever.
Of course, fast-forward 10 years, a couple of kids, and two lucrative career paths later, and our newlywed lifestyle is a distant memory. As we’ve aged and improved our earning potential, we are now more concerned about mortgages and retirement savings than stretching our grocery dollar and making rent.
As you land better-paying jobs and advance through the years, it’s only natural that you’re going to “add on” to your life by purchasing a home, buying cars, and so on. Quality of life naturally increases with pay scale – you shouldn’t feel bad if you aren’t still living on a student budget a decade after you’ve graduated.
However, an article published by The Atlantic (using data from the U.S. Bureau of Labor Statistics) contrasted a family’s spending habits to its earning potential, and the results were eye-opening. The average family led by someone with a high school education only had about $35,000 in expenses each year. A family with some college increased those expenses to $43,000, and a family led by a college grad had $63,000 in expenses each year. When those expenses were broken down, each family spent the same ratio on cars and housing: 50% of their income.
Does the college grad family have higher expenses out of necessity? Probably not. They could likely spend less and get a cheaper car or a smaller house. But because they make more, they spend more.
Avoiding Lifestyle Inflation
Avoiding lifestyle inflation means that when you receive a raise, you don’t increase your purchases. Instead, you make plans for that extra money and use it to further build your financial security. It can be a slippery slope, so if you find yourself itching to spend after scoring a big promotion at work, try these tips to keep the money in your pocket.
1. Be Conscious of Lifestyle Inflation
When my husband transitioned to his post-college career and started making more money, I felt like we deserved to buy nice things because we had worked hard and gone without during our university years. Of course, this attitude led to overspending.
While we were making significantly more, our bank accounts looked just like they did before the career change. It wasn’t until we became conscious of lifestyle inflation that we reined in our spending and thought seriously about how to handle the extra cash. There’s a lot to be said for reminding yourself that a raise or bump in salary isn’t just “fun” money. If you spend it too fast, it won’t feel like much of a raise at all.
2. Calculate Real Changes to Budget
After taxes and expenses, the effect of a raise is often less significant than you first think. Take the time to calculate the real change to your budget and determine how that extra money is going to affect you.
If your boss offers a $12,000 annual raise, that works out to $1,000 more per month. Subtract roughly $400 per month for taxes, depending on your total salary, and your “huge” raise is now an extra $600 per month. It’s nothing to sneeze at, but it’s not exactly a huge bump in lifestyle either.
Calculating the real and final amount that lands in your bank account each month can provide a healthy dose of perspective. Once you’ve done the math, you might find that your raise doesn’t exactly merit a new car or shopping spree.
3. Value Experiences Over Things
If you start making more money, feel free to spend a little bit to improve your lifestyle. However, instead of going for a new car, house, or expensive wardrobe additions, consider investing in experiences. Going on a vacation or signing up for a class can create memories that give you a lasting satisfaction, making you less likely to keep spending. Contrast that to shopping for new clothes, which produces a short-lived high that needs to be replicated.
Talk to your family about your new personal budget and why you prefer not to spend that extra cash on “things.” Chances are, when you suggest fun experiences as the alternative, they’re going to be on board.
4. Hang Out With Friends Who Have Similar Budgets
Feeling jealous about money and keeping up with the Joneses is part of human nature. Because you want to prove that you can afford the same things as your friends, you spend more than you want to – especially when you’ve gotten a bump in salary. That’s why it pays to spend time with friends who have similar lifestyles and budgets as you.
For example, consider a night out: If your friends live an inflated lifestyle, you might be enticed to go to a pricier restaurant, order expensive drinks, or even pick up the tab. If your friends live more modestly, on the other hand, and you match your behavior to theirs, you’re likely to spend less.
A 2012 Consumer Expenditure Survey by the U.S. Bureau of Labor Statistics found that the “rich” – those who make more than $150,000 per year – spend 5.4% of their income on food and 5.7% on entertainment. The “poor” – those making less than $20,000 per year – spend a little less: 4.7% and 4.8%, respectively. While that might not seem like a huge difference, percentage-wise, it means a rich person could be spending $8,100 on restaurants compared to a poor person’s $940. Hanging out with someone who has a vastly different budget than your own could result in pressure to spend more.
The same could be said for cars, houses, and other possessions. If you think your friends are more successful than you, you might feel the urge to push your budget to the max in order to keep up. Instead, friends with similar financial goals aren’t going to pressure you into an expensive restaurant or make you feel bad about your older-model car.
5. Transfer the Excess
Out of sight, out of mind: If you want to protect the extra cash you get from a raise or new job, get it out of your bank account ASAP. After all, if you’re happy with your current lifestyle, why should it change?
My husband recently changed jobs, and received a significant salary increase. We didn’t need the extra money to cover essential expenses, and I knew if it was in an easy-to-access account it would be too tempting to draw on, so I set up a new retirement account. The surplus is now automatically transferred after each pay period, so I can’t get to it and spend without thinking.
Before you start spending new, additional income, determine whether you’re happy with your current lifestyle. If your needs are being met, set up an account and transfer the excess so you don’t end up spending it needlessly.
6. Outline Your Goals
Changing jobs, getting a raise, or getting a promotion all have a way of forcing you to focus on your financial goals, and for good reason. Without clear objectives for you and your family, you could end up spending that extra cash on things that don’t bring you closer to those goals.
When you get that raise, sit down with your spouse and talk about where you want to be in two, five, or even ten years. Whether you want to travel more, save for your kids’ college educations, pay off debt, or buy a home, redefining your goals and sketching out a game plan can reveal where that extra money needs to go. In short, you’re less likely to experience lifestyle inflation if you stay focused on your goals and understand how that windfall can help you achieve them.
7. Avoid New Debt
Racking up credit card balances, financing a new car, or otherwise going into debt when you get a raise is step backward. Unfortunately, it’s a common move because folks often feel they can “afford” that new debt.
The simple truth is, there’s no such thing as being able to afford debt. All it does is spread your budget thinner, even when you’re earning more. When you factor in interest rates, the picture becomes even more bleak.
Instead, pay off any debts you currently have, starting with the smallest. Throw more than just the minimum payment at them if you want to make a real impact. Then, when everything is paid off, open savings accounts for things you eventually want, such as a car or home. This can help you put together a larger down payment and often get a lower interest rate when the time comes.
8. Make Gradual Changes
There’s nothing wrong with improving your lifestyle as you achieve success in life. However, no millionaires got to where they are now by blowing extra funds the minute they hit the bank account. Instead, the most successful people generally increase their spending on things such as homes, cars, clothing, food, and vacations little by little.
It’s important to keep in mind that when you increase your lifestyle, you also increase your long-term expenditures. An expensive car might require a pricier mechanic, and a big house requires more upkeep. Don’t go “from zero to sixty” in the first few weeks following your change in income. Celebrate modestly and pat yourself on the back. Then, plan your next move, remembering that small, incremental changes are much more sustainable than huge, life-altering decisions.
9. Don’t Equate Success With Material Things
If there ever was a financial epidemic in the United States, it’s the obsession with material goods as a means of proving our wealth and success. We want our neighbors and friends to see our prosperity, so we use pricey possessions to flaunt it.
However, the fundamental flaw is that we also live in a country where luxury goods aren’t limited to the wealthy. Almost anyone can qualify for the necessary credit to purchase cars, homes, boats, and other items without actually being wealthy or successful. In the end, you could find yourself competing with someone in a completely different tax bracket.
Stop measuring your success in life with material goods – yours and your neighbors’. The true measures of success are health, love, friends, family, and experiences. As long as you’re happy with your quality of life, you shouldn’t feel the need to prove it. In fact, you just might find yourself the object of envy when others see how easily you’re able to retire, send your kids to college, travel, and otherwise enjoy life while they’re still paying off debt into their later years.
Greater income helps you achieve increasing financial goals as you advance through life. Be careful, though: Feeling that you have the right to spend more in order to prove your success is tempting, and could have you blowing through that windfall before it makes a meaningful difference. Instead, make a plan and remember that your success shouldn’t be tied to material goods, but rather how you put your money to work for you and your long-term goals.
Have you ever experienced lifestyle inflation?