This article is part of our 12 Keys to Lasting Wealth Series – (Key 1: Avoid Lifestyle Inflation).
Lifestyle Inflation.
It’s hard to avoid, and it strikes all of us. From doctors to janitors, we’re all seduced into spending just as much or even more than we earn.
The sad part is that by saving just 10% to 15% of our income we can put ourselves on the fast track to wealth creation.
So how do we beat the temptation of lifestyle inflation? How do we resist the urge to spend all our money purchasing the newest, best, or biggest thing that catches our eye?
Make Your Savings Automatic
The old saying, “Out of Sight, Out of Mind” works magic for your finances. You never miss what you never see. The easiest money to save is the money that never touches your hand.
This is perhaps the surest way to tame lifestyle inflation. Simply open a savings account and have a portion – say 5% to 10% of your paycheck – automatically deposited to the account. You can use a credit union or online bank like ING direct. These accounts tend to offer the highest interest rates.
Having personally done this, I’ve found that after the first few months, you don’t even miss the money you’ve socked away. You’re simply forced to live on what is left over, and it’s easier than you think. Plus you get a psychological boost from seeing your savings grow.
Review Your Current Spending
It’s funny how recording your spending helps highlight money mistakes. Did I really need to waist $117 a month getting snacks from vending machines? How about spending $240 eating out for food that was no good anyway?
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There’s something powerful about writing down and seeing exactly where your money is going every month. You also gain the power to discover where you can slash costs.
As we mentioned in the last post, you can crush lifestyle inflation cold by using our Financial Tracking Sheet to determine where you spend your cash. Once you’ve done this, try to cut costs by 10% in each spending category.
In the food category, for example, people can usually cut spending 10% simply by going out to eat a few less times a month, taking lunch to work once or twice a week, or by buying more generics during the weekly grocery trip.
Cutting just 10% in each spending category is an easy way to dramatically strengthen your finances, leaving you with money left over to save, invest, and pay off debt.
Live Like You Never Got That Pay Raise, Windfall, or IRS Rebate
You’re finally getting that well deserved pay raise. Yet even before the extra money hits your hand, you’re envisioning new shoes, a new television and perhaps even a new car. Stop lifestyle inflation in its tracks by continuing to live on your old salary while socking away your raise into a savings or investment account.
Ask Yourself This One Question
Deep down, many of our purchases – especially the more expensive ones – are made to impress others. We may not want to admit it, but we’ve all been guilty at one point or another.
This need to impress and prove ourselves with expensive toys can place a heavy toll on our finances. When contemplating a major purchase ask yourself this question:
If I lived in another country where no one knew me, would I still buy this item?
If the answer is NO then maybe it’s time to reconsider your purchase.
Pick Your Pleasure
Like kids in a candy store we want it all. We must have the fine dining, designer shoes, latest fashions, large houses, and expensive vacations.
As kids we realized eating all the candy we got our hands on quickly made us ill. Yet, as adults we fail to realize that indulging in everything that attracts our attention can make us financially sick.
There is a remedy. Determine what you REALLY enjoy the most. Indulge in one or two of these guilty pleasures while ruthlessly slashing spending in other areas.
If you have an eye for designer handbags, indulge BUT cut costs dramatically elsewhere. Take your lunch to work instead of eating out. Cut your cable and cell phone bill. Learn to use the library instead of heading to the book store or put off buying a new car for another year or so.
Do you love eating at fine restaurants? Enjoy yourself but go to fewer movies, buy fewer clothes, and forgo that expensive foreign vacation.
As kids we had to make choices. If we wanted the Now-And-Laters we had to put back the candy necklace. Making the same decisions as adults allows us to spend money on what we truly enjoy while cutting back in areas that matter less to us.
What Are Your Suggestions?
How do you resist the temptation to spend every last cent you make? How do you avoid lifestyle inflation? Be sure to share your experiences with others by leaving a comment below.
So by now you realize that lifestyle inflation keeps us all poor. Learning to spend less than we make puts us ahead in the money game.
Let’s move on to the next key needed to creating lasting wealth.
Once we understand the true nature of wealth we can start making our money work for us instead of against us.
Personal finance is about more than math. It's about behavior. Change your behavior and you change your financial situation.
When we spend money we're really exchanging time spent on the job (our life energy) for a product. Understanding this leads to better buying decisions.
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