Lifestyle inflation is keeping you broke

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Lifestyle Inflation is what keeps the middle-class on the wealth-building treadmill

Lifestyle inflation is a simple concept. As your income rises so does your standard of living. An example of lifestyle inflation would be buying a new car to reward yourself for getting that promotion at work. It sounds harmless and even quite ordinary.

Sadly, it has become ordinary to spend more money as you make more money. Lifestyle inflation is the reason most people in the middle-class, remain in the middle-class. Have you ever felt “stuck” in life? You worked 55 hours last week and still can’t pay off that credit card. Odds are that lifestyle inflation has something to do with that.

Building wealth isn’t about how much money you make, it’s about how much money you save. Your savings rate, how much of your take-home pay you save, is the most important number when it comes to your personal finances.

That’s why I am such a fan of the Financial Independence, Retire Early (FIRE) movement. The only variable you need to keep track of is your savings. If you know your savings rate, you know how many years until you can retire.

Having everything depend on your savings rate feels very fair to me.

  • If you have a low income but are willing to make sacrifices, you can achieve a high savings rate.
  • If you have a high income but fall victim to lifestyle inflation you will have a low or even negative savings rate.

A simple way to increase your savings rate and avoid lifestyle inflation

Your boss calls you into his office to let you know that you have received a 5% pay raise. Congratulations take a minute to enjoy the moment and the recognition of all your hard work over the past year.

Now for a critically important question, what are you going to do with that extra 5%?

My advice; pretend like it doesn’t exist.

Set up an automatic withdrawal to move that extra 5% from your checking account into an investment account every payday.

Then you simply live your life as you did before the raise. You were able to survive before you got that 5% pay raise and you’ll be able to survive if you dedicate all that new money into savings.

Supercharge your savings rate in a few years.

Let’s say your take-home pay was $5,000 per month. Let’s also assume that right now you are saving 10% or $500 per month for retirement. That would put you on a 51-year path to retirement.

If you got a 5% raise each year, you have two options.

  1. Give into lifestyle inflation
  2. Save that extra money

If you spend your raise on eating out and new TV’s, you will remain on a 51-year path to Financial Independence.

If you automated that 5% raise into an investment account, here is how your savings would change each year.

  • Year 0: saving $500 per month, 10% savings rate, a 51-year path to Financial Independence
  • Year 1: saving $1,013 per month, 20% savings rate, a 37-year path to Financial Independence
  • Year 5: saving $1,882 per month, 30% savings rate, a 28-year path to Financial Independence

Learn to love the life your living right now

Without making any cuts to your current spending’s you can increase your savings, build wealth and put yourself on the path to financial independence in just a few years.

Building wealth is not complicated. Anyone can do it by following two simple steps.

Step 1: Make more money

Step 2: Save all the new money you make.

I just demonstrated how you can use your annual pay raise to increase your savings rate and build wealth. That is only one application of the two-step process wealth-building process.

There are endless ways we can earn extra income.

  • Consider a side-hustle. Driving for Uber or Lyft is an easy way to make extra money in your free time.
  • Pick up some over-time hours. If your work offers you the ability to work overtime hours take advantage. You might even be eligible for time and a half or double-time if you work a certain number of hours in a week.
  • Start a side business. A side business is like a side-hustle with two major differences. A side business is something you are passionate about and has no income guarantee or income cap. You could make $0 on a side business or you could make a ton of money. The market will decide.
  • Get creative. Do you have too many “things” around the house? Consider a yard sale. Even a few extra bucks can get you motivated to find the next idea to make some extra money.

Whichever way you decide to make more money it’s critical that you have a system in place to ensure that money goes towards savings. You might have the best intentions to save that money before you make it. Once that money is in your pocket, it’s easy to tell ourselves that we deserve to treat ourselves.

That is where automating your savings is so powerful, it removes you from the equation. When the option to spend that new money is removed, you’ll likely find that you don’t even miss it.

There is a reason the government has your employer automatically deduct your taxes from your paycheck. If someone hands you a hundred dollars and then they come by your house the next day and take $30 out of your pocket, odds are you’ll be focusing on the $30 you lost rather than the $70 you gained.

If your employer didn’t deduct your taxes from our paychecks and we had to write a check to the government ourselves every month, odds there would be a revolution. The government understands if you never see the taxes coming off your check you won’t miss it.

Out of sight, out of mind.

The same rule applies for any new money you make. If you make it a habit of automatically saving that money you won’t miss it. It will feel like it was never there and one day you’ll look at your investment account and realize you’re rich!

Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.

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