Lifestyle Inflation: Your Worst Enemy

You've probably earned a raise at least once before. The feelings of joy and accomplishment that come with that raise usually make all those extra hours working from home worth it. But throughout our careers, it's easy to fall into a trap: lifestyle inflation.

What is lifestyle inflation? Lifestyle inflation is our tendency to spend more as we earn more. It's also known as "lifestyle creep" because these lifestyle changes can sneak up on us.

For example, one year, we might use our raise to eat out more, book an extra staycation, and buy a new wardrobe. Fast forward to 5 years later, and we might have even more material things to show for our raises. Think of an espresso machine, a home cinema, and a bigger apartment. And yet, we could be no closer to reaching our retirement goal.

To avoid falling for lifestyle inflation, here are a few things to keep in mind when receiving your next raise:

Don’t let lifestyle inflation eat away at your long-term goals

Lifestyle inflation can make day-to-day life feel bigger and brighter, but on the flip side, it can also make it harder to reach your long-term goals, such as retirement or sending your kids to school.

In other words, you get to live a little more comfortably today and tomorrow. But, you'd still retire at the same time with the same amount or still buy the same type of home you were initially saving for. So, it allows you to increase your spending, but it just doesn't get you any further in the longer term.

Be intentional and strategic about how you spend your raise

We’ve established that lifestyle inflation will lead to a more enjoyable life day in and day out but that it won’t materially improve your future. So let’s take a closer look at ways to keep lifestyle inflation in check while investing in yourself and your future:

• Instead of keeping up with the Joneses and purchasing more “things”, start contributing a healthy amount of your raise to reducing debt (if you have any).
• Then, start saving and investing towards your long-term goals. You might even be able to retire sooner or start that business a few years earlier than you’d planned to!

The wealthy stick to budgets, too

Just because you’re making more money doesn’t mean that you have to stop thinking about where you allocate your money. But you also don’t need to overcomplicate how you allocate your salary. Let’s say you’ve earned an RM1,000 raise. You could start by putting RM500 more per month towards retirement, and RM250 towards a down payment for a flat. And when RM500 a month towards retirement doesn’t seem like much or worthwhile when you could put that towards a flight to Bali, consider this: your RM500 per month will be RM1,000,000 in 40 years. A small decision can have an enormous impact in the future.

Just because you’re making more money doesn’t mean you have to stop thinking about budgeting. But you also don’t need to overcomplicate how you allocate your salary.

Let’s say you’ve earned an RM1,000 raise. You could start by putting RM500 more per month towards retirement and RM250 towards a down payment for an apartment. Then, use the remaining RM250 to treat yourself!

And if you think that putting an extra RM500 a month towards retirement doesn't seem like much, just remember this: your RM500 per month will be RM1 million in 45 years. A small decision can have an enormous impact on your future finances!

It’s still important to treat yourself

2021 was a tough year for a lot of us. Many of us worked longer hours with remote work arrangements, while social and travel restrictions persisted throughout the pandemic.

Remember, you can always reserve a portion of your raise to enjoy your work achievements and make your day-to-day life more comfortable. Maybe that raise will allow you to enjoy more dinners out or upgrade your flat with that new sound system you’ve always wanted. That way, you’ll still be contributing to your long-term goals while increasing the quality of your day-to-day life.

No matter how you spend your raise, at the end of the day, just remember that you need to be in control of your financial destiny. Just make sure that lifestyle inflation doesn’t control you!

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