Lifestyle inflation is the phenomenon where a rise in your income translates to a rise in your style of living and expenses. Keep a lid on lifestyle inflation with targeted savings.
There is nothing wrong giving your quality of life and style of living a boost when you start making more money. What’s the point of making more money if you never spend it on anything, right? Lifestyle inflation, however, can be a real problem for your future financial health. If you double your income while increasing your lifestyle-related expenses but failing to adjust your rate of savings you’ll end up no better off than if you’d spent all those extra hours of hard work sitting on the dock of the bay.
At the financial blog FiveCentNickel they have a lengthy and most definitely worth reading guide to keeping lifestyle inflation under control. One excellent tip they offer is:
Instead of (or in addition to) setting a goal to save a certain amount of money over a specific time frame, you should set savings goals based on a percentage of your income. If you easily reach your target, increase it. The power of the percentage is that your savings automatically increase along with your income.
If you base your savings on a percentage of your income instead of a fixed amount, then you won’t find yourself three raises down the road still saving like a rookie. Suffering from lifestyle inflation? Received a raise and all the extra money seemed to float right out the window? Sound off with your experience in the comments below.
Strategies to Curb Lifestyle Inflation [FiveCentNickel]