Stop Lifestyle Inflation: Smart Money Moves for Long-Term Success

If you’ve had a few pay rises in recent years, you may have unintentionally succumbed to lifestyle inflation. Also known as lifestyle creep, it’s a mindset that can affect anyone who suddenly has more money in their pocket and, as a result, feels able to spend more freely.

Left unchecked, lifestyle inflation can make it difficult to achieve your long-term financial goals, and could even see you going into debt. Here are the 6 top tips to help you avoid the insidious wealth erosion of lifestyle creep:

1. Create clear financial goals

What are your short-term and long-term financial goals? They might include saving for a deposit on a home, accumulating an investment portfolio and putting aside enough to secure a comfortable retirement. Defined goals help you avoid unnecessary spending.

2. Adopt a lifestyle below your income level

If your income goes up, avoid the temptation to increase your living standard. Instead of buying a new car or the latest technology, invest the extra cash in assets which provide income, or whose value will appreciate over time.

3. Reassess your expenses

Set limits on your purchases and track them using your bank and credit card statements. Conduct a regular review of recurring expenses, and eliminate anything you no longer need.

4. Understand how wants differ from needs

Before undertaking a new expense, ask yourself whether it’s essential, or just something in the ‘nice to have’ category. Consider using the 50/30/20 budget rule, spending no more than 50% of your after-tax income on needs, 30% on wants, and putting 20% into savings or investments.

5. Let savings increase effortlessly along with your income

When you routinely dedicate at least 20% of your income to savings, your savings amount will naturally increase whenever you get a pay rise.        

6. Harness the power of automated investment

Set up automatic transfers into savings or investment accounts, so that you don’t need to remember to save.

How Laura and David avoided lifestyle inflation

David and Laura could meet their monthly mortgage repayments, but there wasn’t much left for extras.

So, when Laura got a promotion and David started a new job at a higher salary, they suddenly found they had some spare cash and started looking at cruise brochures and car showrooms. But before taking the plunge, they decided to consult a financial planner recommended by David’s mate.

The financial planner asked them to bring details of their income, expenses, superannuation, assets and debts to their first meeting, during which she also asked them about their financial goals. They talked about their dream of retiring at 60, with their mortgage paid off, so that they could buy a motorhome and travel around Australia. The financial planner was able to demonstrate that this would only be possible if they maintained their current lifestyle rather than splurging on expensive holidays and taking on the debt of a new car. He helped them to review their expenses, cancel gym and streaming subscriptions they rarely used, set a budget with strict spending limits, automate their savings and choose a suitable investment portfolio.

And when Laura received an inheritance from an uncle, they decided to invest it rather than spend it, so that they’re now on track to retire at 58!

Work with a professional financial planner

Our professional financial planners can show you how to track your spending, set a budget and goals, and create an investment strategy that will feed into your retirement plan. Give us a call for a no-obligation chat about how we can help you avoid lifestyle creep and build a secure financial future.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.