As new mandates and regulations emerge, there is a grand effort towards returning to normalcy after the height of the pandemic while also avoiding new outbreaks. Simultaneously, new fears and uncertainties about the economy are rising. Economists warn that a combination of government stimulus and economic resilience creates a current concern for inflation—or a general rise in prices. In other words, your dollar doesn’t go as far as it used to. However, others combat this theory, saying that inflation is not a significant concern as the economy repairs itself post-pandemic.
While inflation of the economy isn’t guaranteed, another form of inflation should be considered: lifestyle inflation. With restaurants, travel, and other leisurely activities once again accessible, it’s important to keep a consistent budget and monitor spending so that you can enjoy your money now while also maintaining your long-term goals. Understanding lifestyle inflation causes and possible effects and working with your trusted financial advisor to avoid it can keep you on track to achieving your financial goals.
Lifestyle Inflation: What Is It, and How Does It Happen?
Lifestyle inflation is an increase in spending correlated to the rise in one’s income. This can occur in many major life events, such as a new job position, job promotion, graduation, business acquisition, inheritance, a significant raise, and more. A remarkable rise in earnings can cause individuals to prioritize dispensable spending. This can include buying excessive luxury items, spending more on leisure activities like eating out, and travel without proper budgeting.
If I Make More Money, Shouldn’t I Be Able to Spend More Money?
Succumbing to lifestyle inflation is often a mistake that individuals make without realization, and it can happen to anyone. Over time, as dispensable spending increases in small increments and bad habits form, individuals can get comfortable in enjoying the short-term gratification of spending and detract—or even worse, abandon—their long-term financial goals. What starts out as spending discretionary income, which is the money left over after paying off taxes and other living expenses, becomes spending income that was initially meant for savings or investing. This snowball effect can grow from minimizing discretionary income, neglecting or expending savings, to creating and increasing debt and ultimately derailing your finances.
These derailments can have a significant impact on your financial goals. When calculating your retirement expenses, you consider maintaining your current lifestyle or even improving it. So, as your living expenses increase, you much match your savings rate for retirement. However, if you are allowing lifestyle inflation to continue, your income will no longer be able to fit your needs to continue working towards your long-term financial goals. This can also include college savings or preparing for milestones like buying a house or having a child.
How Do I Avoid It?
By being acutely aware of the signs and patterns of lifestyle inflation and accounting for your finances, there are several steps that can be taken to avoid falling into its trap.
First, manage your debt. Whether it’s paying off student loans or mortgages, avoid adding new debt to your plate. Having a sudden increase in income doesn’t necessarily mean you can afford to take on new finances long-term.
Keeping a budget and monitoring your spending. Taking account of your inflows and outflows on a weekly or monthly basis will allow you to create a cohesive spending plan. While budgeting for your necessities, such as bills and savings, you can also make room for discretionary spending that doesn’t hurt your long-term goals. This way, you can enjoy your increased income while still staying on track for your future.
Work With Your Trusted Financial Advisor
A remarkable rise in earnings can call for a restructuring of your financial allocations and can potentially change the pace of your future financial goals. Working with a trusted advisor to adjust or create a plan for your income to work for your current lifestyle and planning for the future will allow you to enjoy your earnings now and later. This can include working towards a tax-advantaged savings plan, retirement planning, estate planning, and investment strategies to create more wealth.
At Idaho Medical Association Financial Services, our advisors prioritize building long-term medical wealth management with our clients while creating a plan that allows them to enjoy their money now. While starting a medical practice in Idaho can be daunting, we help our clients develop and maintain an investment mindset that accounts for a bright future and a current lifestyle that fulfills their wants and needs.
To learn more or schedule a no-cost consultation, call (801) 316-1875.