How to Avoid the Pitfalls of Lifestyle Inflation

Budgeting can help keep your financial goals on track and help to safeguard against lifestyle inflation; instead, focus on protecting your future by setting aside savings for unexpected emergencies and building an emergency fund.

Increased spending to match an increase in income can have negative repercussions for both your finances and future goals such as paying off debt, retirement and starting a family.

Make a Budget

As you work to reach your financial goals, creating a budget is vitally important. Doing so helps set spending limits that align with what really matters in life - such as saving for retirement.

Start by compiling a comprehensive list of expenses and then compare this against your budget. If your expenses seem to be growing at an unsustainable pace without progress towards meeting any of your financial goals, this could be a telltale sign that lifestyle inflation is taking over your life.

As your lifestyle and professional goals shift, so will your lifestyle. However, be wary that new salaries don't get out of control and threaten long-term financial security. Additionally, be sure to leave enough wiggle room in your budget so you can enjoy some of the fruits of hard work without falling into financial distress.

Delay Gratification

Purchases may seem appealing at first, but they can quickly become an anchor on your financial future. This is particularly true if your higher income needs to cover new lifestyle expenses.

Imagine this: after receiving a significant promotion and making more money than ever, you may feel tempted to upgrade your lifestyle by purchasing things such as a new car, larger home and better clothing.

Delaying gratification is a key strategy to avoid lifestyle inflation. By taking a step back and considering your needs and wants, you can make decisions which will have long-term financial benefits.

An effective first step to financial wellness is creating a budget, tracking spending habits and setting long-term financial goals for the future. Money Canvas by Thrivent Financial can assist with these processes while simultaneously building healthy daily habits that lead to reaching long-term financial objectives.

Avoid Unnecessary Debt

Lifestyle inflation may be necessary when raising a family, such as when purchasing larger housing and clothing needs. However, excessive spending increases may wreak havoc with your financial future and put undue strain on debt-to-income ratios while making long-term goals harder to attain.

Avoiding unnecessary debt is key to combatting lifestyle inflation. Before purchasing anything, ask yourself whether it meets a need or wants. Use an app such as Mint to track spending habits and stay within your budget.

Pay increases can be welcomed as an increase in wealth; however, they can become unmanageable easily if allowed to increase beyond control. To prevent lifestyle inflation, focus on enriching life through experiences rather than material purchases, and commit to automating savings plans which adjust as your income does - ensuring your newfound wealth helps build long-term security and achieve your goals.

Save for the Future

Rewarding yourself after hard work can be rewarding; however, when upgrading your lifestyle and spending more than you are earning can become financially stressful and inhibit reaching long-term goals.

Lifestyle inflation can happen after receiving a significant bonus or raise, getting closer to retirement or starting their first full-time paycheck after college graduation. To stay on track and meet financial goals successfully, be mindful of this trend by making necessary changes that reduce unnecessary expenses while staying true to yourself and staying within budget.

Use any increase in income wisely; rather than blowing it on new shoes or vacation plans, use it to build up an emergency fund, add to an investment portfolio, save for retirement or pay down debt. By following these strategies you can ensure any increase in income is contributing to long-term financial security and success. 1

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