Fighting Lifestyle Inflation

What is the first thing that many people do when receiving a bonus or a pay raise? “Treat yo self!” It is extremely easy to take that extra hard-earned money and splurge, such as subscribing to that add-on for your cell phone or adding those extra television channels. What makes it all the more dangerous is the incremental nature of this inflation that most of us succumb to. Taking a step back to consciously analyze monthly spending is the only way to truly see our expenses creep up. In order to pay down debt and make big investments into real estate or other asset classes, expenses must not increase at the same rate income increases.

Taking a hard stand against lifestyle inflation requires structure. Build a budget – and stick to it! Once the budget is built, track your monthly spending. Similar to the “Key Performance Indicators” in your business, the lag metrics of monthly spending will help you identify problem areas and trends, and make the small adjustments needed to stay within the lateral limits set by your budget.

Take that extra money and pay down high-interest debt, or increase investing! With every pay raise, increase the amount of money you allot towards your high-interest debt first, then your investment and savings accounts. You will see your balances grow exponentially through capturing larger contributions and the compound effect that these contributions will earn over time.

For many people, myself included, your savings and investments must be automatic. I have automatic transfers set up for my Thrift Savings Plan through work, my Roth IRA, and my savings account. If I do not “pay myself first,” that money will find a way of disappearing.

Furthermore, living paycheck-to-paycheck is a syndrome that can plague individuals at ANY income level. Even well-compensated professionals I work with often complain of issues associated with maintaining little to no savings and investing – and they make well over six figures! It all boils down to individual financial planning and discipline, and recognizing that small, incremental pay raises should increase your investing, and not your spending!