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Congrats! Your hard work paid off and your boss gave you a raise.
Suddenly, ritzy vacations and formerly-too-expensive shoes are calling.
It’s fine to treat yourself, but when it becomes a long-term habit that’s called lifestyle inflation.
The scoop on lifestyle inflation
Lifestyle inflation is when you start making more money so you spend more money.
Suddenly, things you used to think were luxurie—like your morning latte or specific brands of clothing—turn into luxuries.
But there’s a problem with increasing your spending along with your income.
It makes it harder to save or invest.
While you may be living the high life now, it’ll make retirement or buying a home harder.
Ultimately, lifestyle inflation makes it extra-hard to build wealth, the very thing you thought your raise would make possible.
How to avoid lifestyle inflation
1. Keep a budget
First things first, if you’re not already keeping a budget, it’s time to start.
By keeping a budget, you’re setting a benchmark.
If you start to spend more in a certain category, you’ll see where when you do your budget.
It’s tempting to adjust your budget right after you get a raise. Fight that urge.
2. Pay your credit cards in full
The tricky thing about a raise is that you don’t get the money all at once.
Instead, it comes to you throughout the year in increments on each paycheck.
But when you get that raise, it can feel like a big jump.
Suddenly, you feel like you have extra money to play with. And that might tempt you to make purchases on credit.
Keep your credit cards paid in full.
This doesn’t just help to protect you against lifestyle inflation. It also saves you from paying interest (a.k.a., money down the drain).
3. Wait on big purchases, even for a few days
Right when you get that first increased paycheck, you’re probably going to want to celebrate.
You should—but within reason!
Before you splurge on any big-ticket items, sit with the idea for a few days.
Don’t end up with buyer’s remorse and debt that you can’t cover.
4. Lay out your long-term financial goals
It’s easy to spend more once you make more.
That is, unless you take that extra money coming in and allocate it elsewhere.
Take some time to think through your financial goals.
Where do you want to be in a year? What about in three years? Five? Ten? Thirty?
If you know you want to take a big vacation next year, put some of your extra earnings aside for that. Opening up a separate bank account can help here.
If you know you want to buy a house in a few years, start saving for that, too.
And don’t forget about retirement. Getting a raise is a perfect opportunity to set yourself up for success down the road without feeling the pinch now.
Take some or all of your extra earnings and put them in a retirement account.
Repeat that process with each paycheck.
All you have to do to fight lifestyle inflation is not spend more as you make more. These tactics will help, but they all support that philosophy.
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