Lifestyle Inflation

Lifestyle inflation happens when our spending increases as our income goes up. Lifestyle inflation may continue to happen each time we get a raise, and although your income is going up if not managed properly it harder to get out of debt, and save for the future.

One big thing to remember is that it is ultimately a choice. It is natural to want to upgrade to a newer car or apartment because we have more money to spend. Who doesn’t want the newest car or nicest home? However, in most cases wealth and financial stability occurs when your income surpasses your expenditures.

Think about the recent graduate who just scored a full time job and moves into an apartment for $700 a month. After a couple of years and a couple of raises he finds a “better” apartment for $1,000 a month. His first apartment was in a great location, nice neighbors. Yet he traded up to a more expensive apartment … not because he needed to but because he could.

So got a raise? Congrats!!! Check out this tip. Before you increase any spending, consider how much will you actually see. Figure out how much extra you’ll pay in taxes and adjust your withholdings accordingly. The IRS created a withholding calculator to help you determine if the government is taking enough out of your pay to cover the taxes you’ll owe by next April. Make sure you have your most recent pay stub handy to fill it out. Go to https://apps.irs.gov/app/tax-withholding-estimator .

Try to make intentional choices about how you will spend and save. Making realistic, honest assessments about whether a potential financial decision is a need or a want can help you make better financial decisions and avoid lifestyle inflation.