How to Overcome Lifestyle Inflation

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Lifestyle inflation, also known as an increase in spending as earnings increase, can cause severe financial damage. As you spend more, you create a long-lasting cycle of paying bills and struggling to get ahead. To some people, moving up the socioeconomic ladder comes with inherent expectations, namely, machining your level of income to your external imagine. Saving your money as your earnings increase should be the easiest step to start battling lifestyle inflation.

In reality, who wants to save and budget when alternatively, you can enjoy life engaging in social events, traveling, and purchasing items that make you feel and look good.

Well, that’s precisely why you’re not getting ahead—seeking social validation, prioritizing your external image, and Keeping Up with the Joneses. All these things combined seem to outweigh the benefits of long-term planning & saving.

Moreover, we live in a society that has a strange way of flirting with the idea of personal finance. We read the commentary and listen to influential figures who bluster about how they consistently earn $10K or even $100K monthly — as though this is all that matters. Be that is it may, a high income loses its value when its primary purpose is to support poor money spending habits.

North Americans are amid an inflation comeback, so taking control of your personal finances should be top of mind. We have no control over the cost of goods in the macroeconomy. Still, we have complete control over our spending power on said goods.

Breaking a few bad habits and learning the basics of personal finance is all it takes to divorce yourself from a problematic relationship with money.

1. Upgrade your spending habits

Our culture, among many others, promotes the idea that higher earnings equate to success. In and of itself, this makes sense. But when salary inflation promotes lifestyle inflation, you’re plaguing yourself to the very same financial situation you’re working so hard to advance from.

The debt to income ratio is a good indicator of financial health. In 2021, the median household income in the US hit $79,900, with the average household carrying an average of $145,000.

Put simply, for every $1.00 earned, $1.81 is spent, resulting in debt growth. 

Living within your means is a lifestyle that I challenge, particularly for households that struggle to pay down debt and save for retirement. Living below your means, in my experience, is not only achievable, but it’s also a more practical way to upgrade your socioeconomic situation.

As a part of my wealth journey, I ensure that as my earnings increase, my spending decreases. Sound radical? Possibly. But effective nonetheless. Admittedly, it was challenging to overcome the temptations of mirroring my external image with my level of earnings. Fortunately, I learned early on that it’s simply not worth it.

  • Reduce your credit card limit. Reducing your credit limit can pose a challenge if your utilization rate is at max capacity. Once you get your credit card paid down incrementally, decrease the limit in lockstep with your reduced balance.
  • Don’t finance a vehicle; purchase instead. Beaters still do the job, and there’s a strange sense of humbleness that comes with driving an outdated vehicle. Coming up with the additional funds for a used vehicle is difficult, but it can benefit you in the long run. Taking on the challenge to work extra hours, taking on a second job, and saving vigorously, can help expedite your goal. Need I say, purchasing an older vehicle can come with inherent maintenance issues, so take the time to do appropriate background checks on reliable makes and models.
  • Apply the 30-day savings rule. Put on hold an impulse purchase for 30 days; if after 30 days you still want it, reconsider. Often, we overcome an impulse purchase if we take the time to rethink it. Consistent practicing of this rule can help break bad money spending habits you struggle to overcome.
  • Leave your credit card at home. If you’re struggling to break bad money spending habits, you likely use your credit card to replace an empty bank account balance. In this case, if you leave it at home when you go out and only have access to one bank card, you are limited to your funds rather than abusing a credit limit you can’t afford to pay off.
  • Automate your payments. I can’t stress this enough, and that’s because it works. Take note of how much you have leftover after all mandatory monthly bills, then automate the vast majority of what is remaining.
  • Cash-only. Set aside a budget that allows you to enjoy entertainment each month. Use cash for all entertainment, and don’t over exceed your budget. Having access to credit cards can promote overspending and get you into financial troubles.

Lifestyle changes are never easy and can be challenging when it requires changing your behavior. But all valuable change comes at a cost.

2. Become financially literate 

Let’s face it; we can’t rely on our education providers to dispense practical and valuable money management information. It is entirely dependent on individual initiative.

It’s not uncommon to be unaware of what your financial statement looks like. Overspending, over-borrowing, and neglectful allocation of funds can go unchecked due to a lack of awareness. 

Prior to the Covid-19 pandemic, on average, 72% of Americans felt stressed about their financial situation. Stress can lead to other serious mental health concerns. You see where this can lead to if the root cause is not addressed.

In Canada, financial illiteracy is equally problematic, and the numbers are pretty shocking. According to a 2019 survey conducted by the government of Canada, only 33% of the population is financially secure. 

Financial illiteracy is a problem that, for some reason, gets put on the backburner, possibly because ignorance is bliss. It feels better to ignore the problem than to confront it.

But who’s to blame? Is it societal norms and expectations, or the education systems that fail to teach personal finance, or is it a lack of discipline among consumers? I think all three hold equal weight. Accepting personal responsibility is the most effective first step in overcoming financial adversity. Initiate your learning and adopt a few of the easy habits listed below.

  • Read books, and more books. Reading personal finance books for beginners will be one of the best ways to lay down a solid foundation to keep you going. Be consistent with your readings and learnings, and don’t give up. Contrary to popular opinion, I don’t recommend committing to reading as many books as possible because it will lead to burnout, and you won’t absorb anything. Go at a pace that allows you to absorb information efficiently so to apply it to your unique situation. Here is a blog that includes a list of top-rated Canadian financial books for beginners. 
  • Utilize Personal Finance Apps. Everyone is becoming a pro at maximizing the utility of social media apps, so why not take that exerted attention and allocate it to apps designed to keep your finances on track. Below are three tools I use.
    • Mint is a money management app that offers a user-friendly interface designed to connect with your primary bank account. It does all the tracking for you and keeps you informed on your spending habits. 
    • You Need A Budget (YNAB) is an excellent alternative to Mint and recently has earned rankings that make it superior to Mint. It serves the same saving, budgeting, and spending tracking purpose.
    • PocketSmith is another app I recently decided to experiment with, and I love the ease of use and up-to-date information it provides.
  • Read Financial Magazines. I suggest making it a habit to read financial magazines of your preference. What’s excellent about magazines is that they consist of diverse writers who bring different knowledge, experiences, advice, and perspectives to the table. Below are a few online magazines I regularly read to help me with my financial decisions.
    • Yahoo Finance. This was my first resource years ago when I started my wealth-building journey. I currently use it for all financial news and updates.
    • MSN Money Canada. This online magazine offers a wide range of information to meet the reading needs of a diverse group. If you are interested in monitoring the market for your stock portfolio, this is your go-to. I utilize this resource for the retirement investment information it provides me.
    • Financial Post. This newspaper is Canadian-based; therefore, it has narrowed information and news exclusively on the Canadian market related to investing, personal finance, inflation, etc.
  • YouTube & Podcasts. For all you auditory learners, YouTube & Podcasts were designed with you in mind! These are the more popular options at present, given social media’s popularity. Dedicate your commute to work, morning/evening walk with the dog, and gym session to becoming more financially literate. 
  • Government Workshops. The Government of Canada offers many FREE online resources for Canadians interested in upgrading their finance knowledge.

Becoming financially literate is among the best personal investments you can embark on. Don’t underestimate the value of putting a few dollars to work. Many people share the notion that a few dollars won’t change their financial situation; therefore, they spend it on consumer goods. This notion is a fallacy that perpetuates a toxic relationship with money. Adopting the habit of investing or saving every extra dollar is the starting point to becoming wealthy.

3. Set spending limits

Does money solve all our problems? Or, does money magnify all our problems? It’s likely dependent on the person and their relationship with money.

Suppose money is used primarily as a tool to appease short-term gratification. In that case, it can garner grave despair in your life.

If money is used primarily as a tool to appease short-term gratification, it can garner grave despair in your life.

Let’s consider Parkinson’s Law for the sake of understanding why so many people struggle financially. According to the law, people will almost always spend what they make or more, despite income and debt levels. In other words, spending increases in lockstep with income, also known as lifestyle inflation. The law suggests that overspending is the primary reason most people retire poor.

  • Allocate your increased earnings into separate accounts. Say you earn a promotion with a 15% salary increase, automate your additional income into a designated account to pay down debt. The same goes for bonuses. Limiting your access to funds will further promote financial discipline. If you don’t carry debt balances, allocate your additional income into retirement investment accounts (Mutual Funds, ETFs, etc.).
  • Challenge yourself to decrease your non-essential spending in response to an increase in earnings. Rather than rewarding yourself by purchasing more clothing, a new vehicle, or pampering yourself regularly, cut these expenses even further than they were prior to your increase in earnings. 

Tracking your spending to produce the desired outcome requires consistent, dedicated effort. Naturally, this can be tedious and monotonous. However, living in a perpetual state of financial stress — just scraping by — is more notably monotonous.

Final Thoughts

Radical change is often a requirement in adjusting the trajectory of one’s life. It can be difficult, no doubt, but living a life filled with financial stress caused by overspending is arguably more difficult. Take the initiative to self educate and be on your way to better manage your finances with reduced spending and more saving. That’s the goal, and with the above resources, Canadian’s can be equipped with the necessary basics to get their financial ball rolling.

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