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The majority of us will start our working lives at, or around the bottom rung of the company ladder; both in terms of responsibility and wages.
This is just how the working world works. The more experience you have and/ or the more specialised you become in your field, the higher the wage you can command to trade that experience and ‘know-how’ for more money.
Obviously this isn’t always the case. We may be unfortunate to lose our job or move into a different field that doesn’t pay as much. We may also be an Oxbridge student with banking connections (Dad’s mate) that goes straight into a £50k a year starting salary in ‘the big smoke’, but the majority of us will start around the bottom.
Hopefully over time you’ll move around or rise up the ladder (if that’s what you want) and slowly but surely increase your salary.
But with this increase can come a prevailing need for the material: a nicer car, fancier branded clothing, bigger house etc. With the extra bit of bunce in our monthly pay cheque our head might start to turn towards expenses we would otherwise never have considered before.
Lifestyle inflation is the increase in spending behaviour an individual may start to adopt due to an increase in their earnings
“But AMM, what’s wrong with that? I’m earning more so surely I can spend more?“
Of course! If you want to forever be chasing the next material ‘high’.
But much like how your investments will compound and grow your wealth over time, lifestyle inflation has the exact opposite effect as your wages gradually increases.
As you gradually add more and more items to the expenses column, these things start becoming objects and services you begin believing you can’t live without.
They become like a leech attaching themselves to each extra penny you start earning, sucking it dry of its potential wealth creating benefits.
That one streaming subscription becomes two…three…four; those once a year designer shoe splurges become quarterly and then monthly; the grocery bill starts growing as you become less inclined to seek out the bargains that, compounded over the course of a year, make a sizeable difference.
The Lidl bakery brownies no longer suffice, only Waitrose finest will do. I mean c’mon my guy…I don’t care how much you earn, you genuinely can’t get better than a Lidl bakery…and it’s dirt cheap.
Continually increasing your spending more and more will make you more reliant on that next pay cheque. Each month it starts to look more distant as you run out of funds quicker and quicker, overcommitting to the expenses you’ve come to believe are a necessity when, at first, were just a luxury.
How to avoid lifestyle inflation
Make a budget
Nice and simple this one. Just make sure you have a budget in place so you know where your money is going each month and nothing is getting forgotten about. Make sure you’re account for these new additional earnings.
It doesn’t have to be OCD levels of detail, but just so you know where the main bulk of your incomings and outgoings are going.
Once a new subscription gets added to the list when you receive that raise, add it to your expenses column.
Also, by budgeting a ‘spending fund’ each month, you know how much you have to spend on luxuries and can make sure these don’t start consuming more of your increased wage than intended. Start by allocating 10% of your wage to this little pot and adjust to your comfort level.
Live as if you never had a raise
I like this one. For example, if you were earning £1,500 (after tax) before your raise, and are now on £2,000 (just to keep the numbers simple) a month, that’s £500 extra you now have in your pay packet.
If you lived fine on that £1,500, just continue as you normally did and put that extra money aside in your savings.
If you really want to spend some of it, try allocating just 10% of this additional £500 to your spending ‘fun’ account and tuck the rest into your savings. That’s still a nice 50 quid extra a month to spend on beer, cinemas, eating out…whatever…on top of the amount you already allocate to your ‘fun’ pot.
As well as this additional spending money, you’re also now saving an extra £450 a month. This can be adjusted accordingly of course.
If you’re already comfortable living off the pre-raise £1,500, then this extra money can help you start creating wealth rather than just being spent on temporary desires.
If you’re worried you’ll spend this extra £500, why not just chuck the difference into your pension?
Going from £1,500 to £2,000 a month is a 33% increase. Maybe just increase your pension contributions by 33%? This is an extreme example, I know, but adjust this according to your raise.
Experiences over things
And finally, instead of just buying more material things, that you’ll probably get tired of six months down the line, why not invest in experiences with this new found cash rather than stuff?
Use the extra money to invest in yourself and take some evening classes or online courses in something you’ve always wanted to learn. This new knowledge could even come useful later on in your career.
Or take some trips with people who mean the most to you. The memories will last much longer than that new BMW or piece of clothing; there’s always something newer, bigger and ‘better’ round the corner these companies tell you you must, so why bother keeping up with it all?
So next time you’re fortunate to receive a small raise or a bonus, let’s just think about it for five minutes before blowing it all.
By all means enjoy yourself, but let’s try think more about how to use this money as a tool to grant ourselves more freedom, or to be spent on something other than just lining the pockets of the owner of the next fast-fashion clothing company.