Statistics show 50% of six-figure earners live paycheck-to-paycheck.
People trick themselves into believing that they’ll start saving once they’ll make more money.
But for most people, an increase in income usually leads to an increase in consumption.
In the personal finance space, this is known as lifestyle inflation — and it affects people from all income levels.
As Dave Ramsey said in Total Money Makeover:
“Lifestyle inflation happens when you increase your spending as your income grows. A little raise here, a bonus there, and pretty soon your lifestyle begins to expand to match your paycheck.”
Lifestyle Inflation Is A Trap
It’s really easy to get caught up in lifestyle inflation. As you make more money, the urge to increase your lifestyle will creep in.
You might spend more money on things like:
A bigger house
A faster, more expensive car
Personally, I started spending more money on convenience and entertainment.
I’d take an Uber instead of public transport. I’d order food instead of cooking at home. And I’d buy new video games for my PS5 (that I would end up playing rarely).
More money in = more money out.
63% Live Paycheck To Paycheck
Lifestyle inflation keeps people living paycheck to paycheck — no matter how much money they make.
Statistics show 63% of Americans live paycheck to paycheck, including 50% of those making more than $100k per year.
Of course, the current economic climate doesn’t help. But lifestyle inflation doesn’t either. Many keep themselves stuck in the financial rat race because they don’t live within their means.
Just because you qualify for a $500k mortgage doesn’t mean you should buy a $500k house
Just because you qualify for a $50k car loan doesn’t mean you should purchase a $50k car
Just because you can go on a $5k holiday doesn’t mean you should go on a $5k holiday
But unfortunately, this is what most people do.
Instead of using some of their income to secure their financial future, they spend it on an increasingly lavish lifestyle.
“When your lifestyle is inflated, it can cause you to live paycheck to paycheck, to stay in debt, and to have little (if any) money left over to save for the future.” — Dave Ramsey
Of course, it’s okay to reward yourself for your hard work. You deserve to enjoy the fruits of your labor.
Just don’t let it slip out of control.
How To Create Financial Clarity
The best way to keep lifestyle inflation under control is to create a budget. By creating a budget, you know exactly where your money is going.
You create financial clarity — and financial clarity is the starting point of financial improvement.
Divide your spending into big category items such as:
Housing (mortgage, rent, utilities)
Transportation (car payments, gas, public transportation)
Health (gym membership, medicine, etc.)
Eating out/ordering food
For each of these big categories, determine how much you can (or need to) spend per month.
Read also: Habits to make you richer ( must read)
The money that’s left over should be used to secure your financial future:
Pay off debt
Build an emergency fund
Invest in stocks or real estate
Save towards other financial goals
If there’s no money left over, you need to analyze which expenses can be cut or reduced to generate some savings.
Maybe there are there cheaper alternatives. Maybe you’ve inflated your lifestyle too much. Maybe you need to give up certain luxuries.
Or maybe you really can’t cut any expenses and you need to focus on increasing your income instead.
Creating a budget isn’t always easy. It can be harsh to be confronted with your current spending habits.
But it shows you the truth — and the truth can be your call to action.
If you want to get ahead in your financial life, you must get a grip on your spending habits. There’s no other option.
Contributed by Jari Roomer
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