Lifestyle inflation is a huge threat to your financial well-being. Unless you’re exceptionally well-disciplined, it’s very difficult to keep your spending from increasing in lockstep with your earnings.
The primary reason for this is that gradual increases in your income/spending are, more often than not, barely perceptible from one year to the next. If you step back and look at the big picture, however, you’ll see that you’ve been working for years and never really getting ahead.
What can we do about it?
One of my favorite tricks for beating lifestyle inflation is to create what I call an artificial sense of scarcity. By this, I mean that you should go out of your way to “hide” your money from yourself.
Start by moving your long-term savings out of your “everyday” bank. Out of sight, out of mind. If you don’t see the money sitting there every time check your accounts, you won’t be constantly reminded of its presence, and you won’t be tempted to spend it.
Beyond this, whenever you get a raise, make a point of increasing the percentage of your salary that goes into your retirement accounts. Also consider setting up (or increasing) an automatic transfer that draws off a portion of your income for long-term goals.
Note that I’m not saying that you should never enjoy the fruits of your labor. We all like nice things, and might reasonably want to elevate our lifestyle over time. I’m simply suggesting that such changes should be the result of a conscious decision.
Also note that this doesn’t have to be an either/or proposition… At my first “real” job, I started out stashing 5% of my salary in my retirement account. From that point forward, I increased my contribution percentage by half of each raise that I received.
For example, when I got a 4% raise at the of my first year, I contacted HR and increased my retirement contribution to 7%. Splitting my raises like this allowed us to enjoy a bit more take home pay while jacking up our savings. Best of all, it was totally painless — you won’t miss what you’ve never had.