As we discussed previously, lifestyle inflation happens when your response to earning more money is to spend more money. This phenomenon happens to the young and old alike. Examining your life and setting goals to conquer this can help you make the most of pay increases. By making a plan for your money, even before it’s in your wallet or bank account, you can take full advantage of your earnings.
- Know what you want to do. Don’t just plan for how you’ll spend next week’s pay, set real goals for where you want to be in a year, five years, ten years, or beyond. Do you want to be debt free? Own a home? Well-traveled? These goals all take money and you can set aside those funds if you prepare.
- If you’re in debt, get out. Use any new income you receive to get out of debt, whether it’s student loans, credit cards, mortgage, or other debt. There’s no point buying more things if you’re still paying off the stuff you bought in the past. Once you can live fully in the present, you can plan for the future.
- If you’re not in debt, save income increases. You may have some immediate spending needs once you’re debt free, but don’t let these get out of control. Take care of emergencies, sure, but begin putting any extra you have straight into savings so that it can build toward the goals you set in Step 1.
- Create a budget. Know where your money is going. Set up a plan so that every dollar is allocated for – whether that’s to pay the electric bill or save for the future. It will eliminate that perception of “extra” money and help remind you of what you’re trying to accomplish.
- Stay on course. You will be tempted overtime to spend money on things that are not associated with your goals. This is not abnormal. You’ll need to decide whether this other thing is worthy of pushing your goals back. Do you really love that new dress more than you want to buy your house? If not, let it go.
If you get a raise or a new job, or simply come into some money, it’s best to take a step back and see how you can best use it in the long term. While a small splurge won’t through off your goals dramatically, continuously splurging and not having a plan will make it harder to get where you want to be. Forgoing immediate gratification is hard in the short term but the long-term payoff is worth it!
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