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Lifestyle Inflation. Is It Limiting Your Wealth Potential?

You've probably heard the adage "more money, more problems." While this saying sounds humorous, there may be more truth to it than you realize. Additionally, this position's issues could limit your wealth potential. This week, we'll look at lifestyle inflation and its common link to restricting wealth accumulation.

What Is Lifestyle Inflation?

Lifestyle inflation, or lifestyle creep, is when a person's expenditure grows as their income increases. In other words, when you earn more money each month, you spend more. Lifestyle inflation often causes people to become trapped in a pattern of living paycheck to paycheck, with only enough money to cover their monthly expenses.

The move from being a college student to being a full-time employee is one of the most common examples of lifestyle inflation. Despite surviving on very little money as a student, goods that were previously "luxuries" can quickly become "necessities," leading to increased expenditures. While this trend frequently happens among students making the transition, it's important to remember that lifestyle inflation significantly affects many people at different stages in life.

How To Spot It

As more money becomes available, it can be difficult to spot when lifestyle inflation is happening. After all, you may think everything will balance out. To keep yourself out of this cycle, knowing the signs is essential. Here are some of the most common:

Your Savings Aren't Growing: If you've noticed you're making more money, but the amount of money you have to invest in savings or investments has stayed the same, lifestyle inflation may be affecting you. Logically, it should make sense that if you have access to more funds, you will have more money after you have paid your necessary bills. If this is not the case, it's time to determine where your money is going.

Your Spending Is Growing: Since you started making more money, are you eating out more? Taking more vacations? Buying new cars? It’s easy to justify spending more on discretionary items when making more. However, at some point, a significant increase in discretionary spending when more money becomes available can negatively impact your long-term goals. If you’ve noticed a significant uptick in your fun spending, lifestyle inflation may be at play.

You’re Not Sure Where Your Money Is Going: Another common habit that occurs when lifestyle inflation begins is a lack of care for where one’s money is going. This often happens because people feel they no longer need to monitor where their money is going. Unfortunately, this couldn’t be further from the truth and can have dangerous impacts. If you’ve noticed a decline in your care for what you are spending and where consider why that might be the case.

Fighting Back

If you want to grow your wealth and secure your financial future, you must avoid lifestyle inflation. Avoiding this trend does have to be complicated. Take small but significant actions to prevent becoming trapped in the lifestyle inflation cycle. Here are some practical measures you may take:

Compute Actual Changes

Most people think a raise or increase in earnings means access to a ton of newly available money, but that’s not always the case. Consider sitting down and computing how much you have at your disposal after taxes and expenditures. Unfortunately, the net impact of a raise is frequently less than it looks.

Make Adjustments Gradually

You should be proud and happy with your new earnings since you worked hard for them. However, consider making incremental modifications rather than drastic ones. Instead of making significant adjustments to your lifestyle in the first few weeks, rejoice modestly. Once the enthusiasm for an increase in income has worn off, you can more clearly examine any future changes and how they may affect your long-term goals.

Never Stop Budgeting

Setting and sticking to a budget is another tried and proven approach to keep your spending under control and your savings on track. This will not only help you stay on track, but it will also help you determine when you are straying from your outlined path due to things like lifestyle inflation. If you don't have a budget, now is the time to start. Learn a simple and effective budget-building process by reading our post Creating A Budget In 5 Easy Steps.

Start Planning With A Purpose

One of the most significant ways you can fight against lifestyle inflation is by developing, implementing, and monitoring a strategy designed to address your situation and future goals. At Fourth Avenue Financial, that’s exactly what we do. Our first priority is always your overall financial success, no matter what life events come your way. If you are ready to start planning for your financial future, we are here to help. Contact us today at (304) 746 7977 to schedule a meeting with one of our experienced financial advisors or schedule online:

Securities are offered through J.W. Cole Financial, Inc. (JWC), Member FINRA / SIPC. Advisory Services are offered through J.W. Cole Advisors, Inc. (JWCA). Fourth Avenue Financial and JWC/ JWCA are unaffiliated entities.

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