This guest post was written by Go Banking Rates, bringing you informative personal finance content and helpful tools, as well as the best interest rates on financial services nationwide. Follow them on Twitter at @GoBankingRates.
The feeling that accompanies a new job, pay raise or big bonus is hard to beat. Suddenly, you can afford all the things that used to fall beyond your standard of living. The nicer car, smart phone and the bigger apartment–now they can finally be yours since you have been working so long and hard for them.
Have you ever stopped to consider whether these upgrades are really necessary, though? Do you actually need to spend more money or simply assume you’re supposed to because you can? This relationship between an increase in income and subsequent increase in expenses is referred to as lifestyle inflation and it isn’t always a bad thing. However, lifestyle inflation can rob you of true wealth and a secure future if you’re not careful.
It’s normal for the cost of your lifestyle to inflate when you move from one life stage to another, such as graduating college or getting married. That’s fine as long you continue to save more than you earn and are putting away plenty in a saving account.
On the other hand, if you’re living paycheck to paycheck in order to meet the financial demands of your life, sooner or later you’ll be faced with an abrupt and sharp downgrade that will likely involve high levels of debt, too. The following are a few of the most common lifestyle inflation culprits that can lead you down a rocky road.
Many people often fall into the trap of buying the biggest house they can possibly afford. This sets them up to encounter problems if the budget gets tight.
Lenders won’t tell you, but they tend to approve mortgage loans based on what you could theoretically afford, not what you should really be spending. Just because you are approved for a home loan does not mean you can truly afford to buy the home. If there is any dip in income or a flood of unforeseen expenses, making the huge mortgage payment on time when your funds are already stretched thin becomes much more difficult and you run the risk of losing your home.
Cars are some of the worst purchases because they depreciate in value so quickly. You literally start losing money once you drive away from the dealership. Then there’s the gas, the maintenance and the thing people tend to forget most often, the insurance. A vehicle can eat up tons of your money and it’s easily avoidable.
That doesn’t mean you should doom yourself to an 80’s sedan with scuzzy upholstery and dents in the bumpers. Just steer clear of the other extreme. A brand new sports coupe with a V-8 Hemi will definitely make you happy, just not for very long.
You know the saying pay yourself first? Cliches become cliches for a reason–because they’re true. If you are not consistently saving money, and a pretty big chunk of it, you’ve got a problem.
Of course, there is no one-size-fits-all solution when it comes to saving. The amount you should be putting away depends on you age, income, etc. However, the general consensus seems to be that a rough 20 percent is a healthy number. Keep in mind you should have both an emergency fund and a retirement plan, too, and it seems retirement requires more than the 10 percent we’ve been told would be sufficient.
Lifestyle inflation is usually the result of wants taking precedence over needs. There’s nothing wrong with making a lot of money and spending on expensive things you like, but you have to balance income and expenses so there is always a healthy buffer of savings in between. Remember, an increase in income is an opportunity to save more and work towards true financial freedom.
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