Fighting Lifestyle Inflation by Sticking To Your Numbers
Updated: Feb 22, 2019
“Meh, I can afford it.” This thought will keep you from getting rich. It’s especially bad if you think it after you get a raise or a new, better paid job. “Meh, I can afford it NOW.” That one's the killer.
The problem, is that like with all the most effective lies, it is built on a destructive truth. You probably CAN afford whatever it is. You might be able to afford it because you’re making such a great salary as an expat (especially here in the UAE). It’s probably something you’ve always wanted and dreamed of having, and now it’s within your reach.
I had a teacher friend who pulled up to work every day in a new luxury convertible. It was a very pretty car. One day I was able to ask her about it, I thought she might be independently wealthy or have a husband who makes way more money than we do as teachers. Nope. She told me something that I’ve heard many times since moving to Dubai. “I figure, I’ll only be able to afford it now, while I live in Dubai, and why not live a little?” She bought it on credit, and followed that up with “It’s probably why I’m not saving much money…”.
In the Financial Independence world, we call that “Lifestyle Inflation”. Basically, as you make more money, you spend more of it on nicer and nicer things. Because you can afford it. And there’s always something else to buy, no matter how much money you make and what you’ve bought before. Thanks Capitalism!
Lifestyle Inflation can easily destroy your ability to save money or make progress towards your financial goals. Are you trying to retire one day? Living large now can keep you from that. Do you want to own property? How will you save up for the down payment if your big paycheck is swallowed by ever increasing spending? You won’t.
Fortunately, there’s a simple solution. When you first get a job, determine how much you want to save or pay down your debts. Then, add your normal bills to that. Those are your normal monthly expenses. Subtract those from your salary. So if you want to save 5,000 AED every month and have normal expenses of 3,000 AED for a total of 8,000 AED, and you make 15,000 AED, you can then spend 7,000 AED every month. The key is to take that 7,000 and figure out how much you can spend each day on expenses like food and shopping. I also like to give myself more on the weekends than on the weekdays because I spend more when I’m not at work. If you spend 200 AED on each weekday, and 300 AED on the weekends, that will be about 7,000 AED a month.
This daily spending amount is KEY. If you can build that as a daily habit, and try to be under it each day, you will rein in your spending and start saving lots. I think of it as a little daily competition, and I get a little burst of happiness if I’m under my amount, for near constant reinforcement of a positive habit.
The way this helps you control Lifestyle Inflation is that when you get a raise or start a new job with more income, you just keep your daily spending number the same. That’s it, it’s the simplest solution to a complex problem that I can come up with.
If you're content spending a certain amount, realize that spending more won't change your contentment, because you were already content. You’re already happy spending that amount each day, and hopefully you aren’t cutting your spending so hard you’re miserable to do it. Any extra money you earn just goes towards reaching your financial goals faster.
Even if you CAN afford it now, you need to realize that spending the extra money isn’t required. You can make that money work for you, creating long term financial stability, early retirement, or opportunities that can only be seized when you have a strong bankroll behind you.
This article originally appeared in The National.
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