How to Avoid Lifestyle Inflation

Improving your lifestyle when earning more money is fine; however, lifestyle inflation occurs when spending outpaces income growth and threatens financial security.

Avoid lifestyle inflation and focus on long-term financial goals is of utmost importance, here are a few tips that will help:

Know Your Limits

As you earn more, it may be tempting to upgrade your lifestyle, but knowing your limits is essential. Ask yourself "Could I live without this purchase? If the answer is no, reassess your budget or consider using a budgeting app as a tool for staying within it."

Though occasional treats are fine, an increase in spending that goes unchecked can be disastrous for your long-term finances. An uncontrolled increase in spending could impede your ability to save, invest and meet financial goals; plus it could force you into debt. But keeping these tips in mind may help ensure you make smart decisions to control spending.

Don’t Be Pressured

No need to be miserly, nor excessive spender. Instead, take advantage of your increased income while saving for future needs, avoiding debt and adhering to budget constraints.

Remind yourself that oversplurging can make it easy to lose track of your financial goals and become consumed with "keeping up with the Joneses", leading to spending and debt that will stymie any chance at financial freedom.

Assuming new debt can increase your debt-to-income ratio, deplete savings and investments, and negatively affect your credit score. A more cost-effective strategy to enhance quality of life while mitigating risks associated with lifestyle inflation would be to set aside part of each raise before becoming spendable money and allocate it toward something useful such as savings accounts, emergency funds, retirement accounts or investment portfolios.

Make a Budget

As your income increases, it is imperative that you monitor and control your spending habits to prevent lifestyle inflation. One method of doing so is creating a budget; tools like Thrivent's Money Canvas may assist with this endeavor or seek advice from financial advisers for guidance.

Upgrades in lifestyle are fine; the issue lies when they take place without also increasing savings and investments to help reach financial goals. Without enough savings or investing, lifestyle upgrades may lead to living paycheck to paycheck and never reaching financial objectives.

Keep up with the Joneses can involve taking on debt such as car loans and mortgages, which while may seem like a quick solution to increase your standard of living can have serious repercussions for both your debt-to-income ratio and credit score. Furthermore, deferring debt payments into the future means forgoing earnings potential in terms of earning potential versus investing it for something meaningful such as an emergency fund or retirement savings account.

Don’t Take on New Debt

Purchase of new shoes or smartwatches may seem innocuous enough, but incurring credit card debt to fund them could be an indicator that your lifestyle is expanding too rapidly. Every time you spend, less of your income goes toward essential bills like taxes, health insurance premiums, housing costs and food costs.

Consuming more money than you make can be fun, but spending beyond what is earned could limit your ability to save and meet long-term financial goals. Living paycheck to paycheck could even become reality!

Staying ahead of the Joneses may be tempting, but it could be detrimental to your financial stability. To reduce lifestyle inflation and stay within budget, set aside a portion of your income specifically for discretionary purchases and ensure you keep an eye on overall spending habits so you don't lose track of income gains with unnecessary expenditures.

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