Managing Lifestyle Inflation

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Lifestyle inflation is almost inevitable. When your income increases, your expenses increase to match or even exceed the additional income. This makes lifestyle inflation one of the biggest obstacles in building wealth. When you get a big raise, start making money from a side business, or generate additional income from your investments, it can be really tempting to buy all the things you’ve been holding off on because now you can finally afford them. But this practice can be detrimental to your long term financial health. Here are a few tips for managing lifestyle inflation so you can truly build wealth.


Create an updated budget before you get an increase.

If you know beforehand how you will allocate your increase, it will be easier to stay disciplined when the money starts coming in. By having a new budget prepared, you’ll be more in control and less likely to spend more than you realize you’re making.


Be diligent with your 101 System.

Track everything. Be conscious of your spending and your goals. Run projections and see how quickly you could pay down debt or pay off investments if you put your entire increase in income toward it.


Define your long term goals.

An increase in income should ultimately help you come closer to achieving your long term goals. But if you don’t clearly know what those goals are, that additional income won’t get you there. Write down your long term goals and focus on them. When you focus on your goals, your increased income can get you where you ultimately want to be, whether it’s freedom to travel, living in your dream home, or retiring on passive income.


Reward yourself.

Celebrate your accomplishment with a reward that is a one-time expense such as a spa day or an updated wardrobe. Then continue focusing on your long term goals. Avoid long-term rewards that don’t contribute to your goals and will prevent you from building true wealth.


Invest long term.

Use your additional income to invest in assets that will continue to produce cash flow, such as rental properties, then reinvest the passive income. If you used debt to finance your investments, such as using a HELOC for investing, use your additional income to pay down the investments quickly. Doing so will double, triple, and eventually 10x the income increase you received.


Make budget changes gradually.

A big raise will seem really small if you suddenly upgrade every area of your life. When you get a raise or a new source of income, be patient in upgrading the new car, new wardrobe, new technology. Especially when it comes to long-term commitments like a new car, take your time to make sure you are comfortable with your new budget and confident in your ability to stick to it.


Spend time with like-minded people.

Socializing naturally comes with pressure to match your friends’ lifestyle habits. If you socialize with people who live more frugal lifestyles with the goal of long term wealth over short term pleasures, you’re more likely to keep pace with those same lifestyle habits. And when you spend time with people who have the same goals you have, you both help each other reach those goals. Take advantage of the Wealth Academy as a network of like-minded people. 


Live like the millionaire next door.

One of the biggest causes of lifestyle inflation is the pressure to establish social standing and keep up with the Joneses. According to Thomas J. Stanley, the millionaires next door live in average houses, drive modest cars, and live below their means. When your income increases, use it to increase “stealth wealth”, or unseen wealth, as opposed to using it for appearances to clarify social standing. 

The majority of these tips can be summed up in these four wise words from Alan Akina: buy assets, not stuff.


Sources: The Millionaire Next Door, Clever Girl Finance, Investopedia, Money Crashers


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