We’ve all heard how lifestyle inflation can wreak havoc on our plans to achieve financial freedom. As people earn more, they use their excess cash flow to make purchases that will, at least in theory, improve their lifestyle. However, many people reward themselves at the expense of their financial goals.
Lifestyle inflation is a trap that often shows up in the form of bigger homes, nicer cars, fancy vacations, etc. While there is nothing wrong with wanting to drive a sports car, buying an $80,000 sports car when you have $0 saved for retirement is a quick way to achieve financial insecurity.
** In these cases, lifestyle inflation is reckless **
Is there a way to reward yourself and still achieve your financial goals? There has to be a balance, right? Lifestyle inflation can be good when it’s done intentionally and with your financial goals in mind. (before you head to twitter and start blasting me, keep reading…)
We shouldn’t fear rewarding ourselves for our hard work! The balance lies somewhere between using money to live a values-centered life and financial conservatism.
Money is a tool, and can (and should) be used to help build the life you want, centered on your values.
What Drives Lifestyle Inflation?
I’m sure you’ve heard the phrase, “keeping up with the Joneses”. The Joneses are the family in your neighborhood that always have the newest toys, the big house, the nice car, the boat, etc.
We want to be like the Joneses because we think those *things* will make us happy. Fundamentally, lifestyle inflation is driven by our desire to be happy.
** Side Note: Before I start getting hate mail… you don’t have to buy *things* to be happy. You can also buy experiences (vacations, events, dining). In fact, I would argue charitable giving is a way to inflate your lifestyle. Ok, let’s move on. **
There are two invisible pieces of the Joneses that we don’t see. First, the Joneses are likely broke. We don’t know whether they are actually financially secure, but rather, they just appear to have money.
Second, they may not even be happy! This is key. We envy them, but they are unhappy. So, we want to be unhappy too? That doesn’t make any sense.
Of course, I’m generalizing. There are plenty of financially secure families out there that drive the car, have the boat, etc. Who am I to tell someone those things are a waste of money?
Instead, I would say they have safely inflated their lifestyle, and hopefully, they’ve done so in accordance with their values. That would make sense, anyway.
I often hear people say, “_______ is such a waste of money”. We can’t forget that waste is relative to your values. The saying, “One man’s trash is another man’s treasure” rings true when it comes to financial plans, too!
How to Safely Inflate your Lifestyle
Not everyone has the money to have flashy toys (nor does everyone want them), but everyone can inflate their lifestyle in their own way.
What I really mean by this is you can spend money on the things you value, and if you get a raise and want to spend more on those things, inflate away!
But first! Here are a few guidelines to use to help ensure you’re doing so responsibly:
1. Set Goals
Setting goals is an integral piece of any financial plan. Without goals, there can be no plan. Your goals should have short, medium and long-term time horizons. When do you want to retire? How much do you want to have saved for retirement in 5 years, in 10 years, in 15 years?
Do you want to pay off your house early?
Are you saving for a child’s education?
SMART goal setting can be used to help you get started with goal setting.
SMART goals are:
Here’s an example of a poorly written goal:
I want to save money for retirement
Here’s a SMART goal:
Over the next 10 years, I want to save $5,500 per year in a ROTH IRA
Clearly established goals will help you gauge whether you are on track to achieving your goals. If you are, there may be room to inflate your lifestyle, invest more or share your blessings with others.
The great thing about YOUR financial goals and plan is that YOU have the freedom to choose how you want to spend your money. Remember, financial freedom is all about owning your money, rather than the other way around.
2. Have a Plan
Once you have goals, you’ll need a plan to get there. At the core of your plan will be your budget.
Your plan will also include:
For more complicated plans, you may consider consulting with a financial advisor or certified financial planner (CFP) who will help make sure all your bases are covered.
Ultimately, your plan will help make sure you don’t drift away from your goals.
Similarly, your plan will help save you from reckless lifestyle inflation.
3. Stick to the Plan
Reckless lifestyle inflation will cut into your progress and untimely prevent you from achieving your financial goals.
Sticking to your plan will require discipline, and in some cases, sacrifice.
If you screw up, don’t beat yourself up! Just get back to your plan, re-evaluate and get back on track.
So, next time you get a raise or a bonus, think about where the extra money is allocated. Are you safely inflating, or recklessly inflating?
I know there are people out there reading this and cringing. How could you support lifestyle inflation! What I’m really supporting is living the life you want to live but doing so with your financial plan in mind.
There ARE people whose financial plan doesn’t leave much room for any sort of inflation. If that’s by design, that’s cool. As we must continually remind ourselves, personal finance is *personal*. What works for you might not work for me, and that’s ok.
Till Next Time!
This article is part of the Guest Post Summer Series. It’s been written by another fellow blogger who was selected to be featured in the series. Make sure to check out their blog for more interesting viewpoints! – Max
Author Bio: This is a guest post by Jason, a husband, dad, money aficionado and entrepreneur. He’s passionate about personal finance and writes about everyday money topics to help you achieve your financial goals. When he’s not writing on the blog, you are likely to find him at his day job (Air Force Officer), with Randy (his coonhound) or enjoying a craft brew!
Readers, do you agree that there is such a thing as good lifestyle inflation? How do you balance managing expenses while still enjoying life? Is it reckless to splurge when you have other financial commitments? Share you thoughts and comments below!
You can call me Max…I’m a Gen-X executive planning to retire from the corporate grind by the age of 45. Although I’m already financially independent, I haven’t yet reached true financial freedom. Join me on my journey as we discuss everything from personal finance to travel and beyond.