It’s easy to fall victim to lifestyle inflation.
What is lifestyle inflation? It is the tendency to increase expenses as earning increases. If you get a raise of a few thousand dollars, you then increase your expenses by a similar amount.
Over time, you find something you like doing, for instance, going out for dinner more often, buying an expensive car, taking an expensive trip, etc. Your lifestyle can tend to go up a little bit. There's a general rule of economics that says expenses rise to meet income.
That's what I have found with many clients who I’ve helped with their finances. A lot of times, whatever people make is what they spend, but if you spend everything you make, of course you will end up with nothing left over. In the end, how your net worth grows and how you achieve your goals is based on what you keep, not based on what you make.
I have clients with super high incomes that save very little and I have people with low incomes that save shockingly high amounts. In the end, it’s all about what you save.
Understand that, lifestyle inflation is acceptable to a certain point because, for example, let's say you’re a college student and you’ve been sharing an apartment with five other roommates. You graduate and get a decent job with a salary and you want to move into your own place. That’s okay. It’s just not okay to the point where you spend every cent that you earn right away.
When you're young, you're kind of adjusting to what your lifestyle is going to be. When
you're not working versus when you are working, of course you're going to adjust. This lifestyle creep I’m referring to is when you come to a point where you say, “I got a salary increase of ten thousand dollars per year.” You know you can save the amount or invest it for your future, but instead you spend it.
What I suggest when you get a raise is to automatically take half of it and save it. When you
have a financial plan that says I want to retire in 20 or 30 years and this is the lifestyle I want to have, then you must define it specifically and create a plan of how to get there. When your lifestyle creeps up, most of the time that means your retirement goal is also creeping up because you've gotten used to more travel, nicer wine and better restaurants.
At the end of the day, you have to find ways to save dramatically more. Even more than what most people save. You have to make sure that you're still putting away enough money for your future.