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Do You Have Lifestyle Inflation?

Remember the last time you got a promotion, big raise, or bonus. You had this wonderful plan about how much you would save or use to pay down debt. Then something happened along the way and after you got that pay raise or financial windfall you cannot figure out where it went. If this has happened to you then it is like you are a victim of “Lifestyle Inflation”.

If it is your first job out of college, a new promotion, or a run of the mill increase for exceeding expectation in your current job. It is natural to want to reward yourself for working hard and getting to the next rung of your career ladder. But if you start spending all the new money you are making then you will never get ahead and end up back in the same situation. There are a couple of terms for this event: “Lifestyle Inflation”, “Standard of Living Creep”, or you may know it as its most common phase “Keeping up with the Joneses”. This is a missed opportunity that could damage your financial security now, a few years down the road, or even into retirement.

One of the basic principles of saving is to live below your means. If you have income that would allow you to live a certain lifestyle, own a certain type of house, or drive a certain type of car. You need to step back and live a life below where you could be and live a life where you should be in order to save. America is designed to be a consumption-based society. The means we want to demonstrate to everyone that we are successful and can purchase nice things for our family, live in a nice house, and drive a nice car. The only issue with that mentality is that it means you are spending all your money to impress people that cannot see you are buying all these nice things, but not preparing for the future.

According to a report from Vanguard, the median retirement account balance for people of all ages was around $26,000 in 2017, which means most of us are not saving nearly enough. Financial advisors say Americans should target to have put away approximately 10 times their income for retirement by the time they hit their mid-sixties. We need to adjust our spending priorities and make savings a larger line item on our monthly budget and plan for that just like we would a vacation.

Lifestyle inflation looks something like this: Thanks to a raise you can finally afford that vacation to Disney or latest electronic device, so you just buy it to reward yourself. Or you go even bigger and purchase a new fancier house which will come with higher taxes, utilities, and maintenance costs than the old house.

Many Americans fall victim to “Lifestyle Inflation” because they feel pressure to maintain the appearances and “keep up with the Joneses” especially in the age of social media. One in four Americans report feeling envious after seeing someone posting about a purchase or vacation on social media in the past year, according to a 2016 study conducted by the American Institute of Certified Public Accountants, and almost 40% of Americans said seeing other people’s purchases and vacations on social media prompted them to “look into a similar purchase or vacation”. If you do not start saving more money as you make more it is easy to fall behind. You may never have the chance to make up the difference, or the compounded interest on that extra savings.

Instead of letting “Lifestyle Inflation” creep into your budget try increasing your 401(k) contributions rate immediately following your raise. That way you will not get used to the bigger paycheck and the additional spending capacity. People who take a longer-term view of their finances tend to balance out better in the end. In addition to boosting your 401(k), raise your monthly deposits to your Individual Retirement Account, pension, or brokerage accounts. If you are already contributing the maximum to your retirement (2019 401(k) maximum is $19,000 or Individual Retirement Account $6,000, and even higher if you are age 50+) consider making one extra mortgage payment each year moving forward. The benefits are two-fold: 1) you are building equity in your home and 2) you are knocking off a few years off your mortgage. The same can apply to other kinds of debt, like student loans. To hold yourself accountable, write down what you will do with your bigger paycheck. Remember if you think it in your head it is a wish, if you write it down it is a plan.

Coveting what your neighbor has is a normal reaction to bringing in more money and providing nice things for your family. Having a one-on-one conversation with your spouse or family about what is essential and what is fluff to your lifestyle can help you realize when you are spending too much, and savings too little.

If you are looking for a Financial Consultant that can work with you to develop a strong strategy for next year - contact Stephen Westurn (214.240.0701) or for a complimentary session. Check out the website: .

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