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Tips to Avoiding Lifestyle Inflation

While some level of lifestyle inflation may be unavoidable, remember that every spending decision you make today affects your financial situation tomorrow. In other words, that $800 pair of Jimmy Choo heels you just bought is coming straight out of your retirement nest egg. Can you afford to spend that much on shoes? Even if you can, should you?

Even with a substantial pay increase, it’s possible, and even quite easy, to end up living paycheck to paycheck, just like you did when you were making much less money.

The increased spending that results from lifestyle inflation can quickly become a habit: the more you earn, the more you burn. You buy more things than you need just to maintain your new (inflated) standard of living.

Spend or Save?
Assume you splurged and bought that $800 pair of Jimmy Choos when you were 25 years old. Imagine you had invested that $800 instead. When you reach age 65, your $800 would be worth $5,632, assuming no additional investment and a 5% interest rate return.

Even though the shoes are awesome, would you rather have great shoes for a couple of years or almost $6,000 extra entering retirement?

Needs and Wants
While some purchases are necessary, it always pays to separate needs from wants. Keeping needs and wants in mind—and making realistic, honest assessments about whether a potential purchase is a need or a want—can help you make better financial decisions and avoid excessive lifestyle inflation.

Another way to avoid excess spending as you make more money is to save or invest a healthy percentage of your increased wages. For example, if you now earn $1,000 extra each month, plan on saving or investing $750—an extra contribution to your 401(k), adding money to your emergency fund, or funding your IRA.

If you stash the extra money away, you won’t be able to spend it on things that don’t really matter.

The Bottom Line
While an income boost is generally welcome, you can be just as broke and in debt whether you’re earning $20,000 or $200,000 a year—it depends on how you spend and save your money.

Putting some of your good fortune to work through savings and investments and being mindful of the differences between needs and wants can help you manage lifestyle inflation before it manages you.

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