Investopedia defines inflation as, "the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling." We see this in our everyday lives when we compare the price of gas today to the price when we first got our license. Or when we go to the grocery store and look at the price of milk. But on today's show we discuss the topic of lifestyle inflation and how it can hurt our finances down the road.
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For most of us, no matter what our income is, we will experience life style inflation throughout our lives. For example, about 10 years ago right after graduating from college, I lived on campus for a year with some of my former roommates who were still in school. I lived in about a 100 square foot "room" for a year. But now I don't have to live like that, or drive the same car I did 10 years ago. So lifestyle inflation in and of itself is not bad, in fact I WANT you to improve your style of living. But sometimes we can fall into a trap of only increasing our lifestyle while not increasing the rate of saving or giving in our budget. This is why, despite the fact that currently you probably are making the most money you have ever made, you don't feel like you are getting ahead.
To increase your lifestyle the right way I recommend doing these 4 things with your money to avoid the lifestyle inflation trap.
Get out of debt-The easiest way to increase your lifestyle is to pay off debt and avoid taking out any new debt. That is because debt increases our risk by adding monthly obligations to our budget. When we eliminate these obligations we are able to spend more and not have to worry about meeting those monthly obligations
Do a monthly budget-By seeing where your money is going either on paper or on a spreadsheet, you will avoid increasing only your lifestyle because you will see that you are out of balance with your spending. This will help you avoid taking out a $450 car payment when you get a $400 a month raise.
When increasing your lifestyle also increase your saving/giving by a set amount-Again I want you to increase your lifestyle, but not at the cost of saving and giving. My wife and I decided long ago that if we ever got a raise we would increase both our saving and giving as well. This has helped us stay in balance while increasing our lifestyle at the same time.
Remember your long term goals-By asking yourself, "How will this increase impact me five years from now?" you will be able to resist the urge to simply just keep up with the Joneses. Instead you will put things in perspective, look at the long run and see if this increase aligns with your goals and values.
If you apply these principals to your finances, you stay away from getting sucked into the trap of lifestyle inflation.
How has your family dealt with lifestyle inflation? Has it been a problem for you? If so how do you fight against it?
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