Do you remember how much you were paid at your first full-time job? If you’ve been in the workforce for a while, your first paycheck was probably just a fraction of your current paycheck. But it was probably enough to cover all your bills at the time. If you’re spending more than that now, you have inflated your lifestyle.
When I started my first full-time job, I lived in a small apartment and drove an old, beat up Toyota Tercel. My first paycheck was all I needed to pay rent, utilities, and I still had plenty left over to go out and have fun. Now, I have a big mortgage payment, car payment, day care payment, various insurance bills, and more. Lifestyle inflation is a natural progression when you get raises, make more money each year, and especially when you start a family. However, there are ways to minimize lifestyle inflation.
The first step toward becoming financially responsible is to not spend money that you don’t have. Try to avoid credit card debt and only spend the money that you have coming in. If the money isn’t there, you need to save up to buy luxury goods or the latest upgrade. You shouldn’t carry any credit card debt at all if you can help it. If you only spend the money that you have in the bank, this will reign in your spending a bit and keep lifestyle inflation in check.
Once you have eliminated expensive debt, get in the habit of paying yourself first. This means you should contribute to your savings and retirement accounts before funding your checking account. Many employers have a 401(k) plan that you can contribute to before paying taxes. Once you set up your 401(k) account, the contribution will come out of your paycheck before the rest of the amount is sent to your bank account for immediate use. You won’t miss that contribution at all if you don’t see it. After you max out the annual 401(k) contribution, you can set up a similar deduction with a Roth IRA or an after-tax account to save even more.
The easiest way to avoid lifestyle inflation is to fool yourself into thinking that you don’t have much money to spend. You can do this by avoiding credit card debt and by spending only what you have in the bank. Also, try to reduce the amount you have available in easily accessible bank accounts by channeling your pay toward a 401(k), Roth IRA, after-tax brokerage account, and other investment vehicles. Lifestyle inflation will still happen, but if you make it a priority to save first and only spend what you have in the bank, you will also have retirement savings and be debt free.
Joe Udo is planning an exit strategy from his corporate job by reducing expenses and increasing passive income. He blogs about his journey to early retirement at Retire by 40.