Avoiding Lifestyle Inflation To Retire Wealthy

Last week, I wrote a post over @ The Financial Blogger that I was infected by lifestyle inflation. This (fortunately curable) infection is being promoted by marketing geniuses all over the world. While we are ultimately responsible for the money we spend every day, we are still tempted and influenced by all the great things we can buy. You don’t have the money right now? Not a problem, we will finance it over 60 or 100 small monthly payments. The problem is that while you are falling into lifestyle inflation, you are not putting money away for your retirement. So today we will look at how to avoid lifestyle inflation and can put money aside for your retirement!

Step#1: Review your budget, review your priorities

The first step of avoiding lifestyle inflation is to know where the cash drain is originating. Are you spending too much to dine-out? Your TV and sound system are payable over 36 months? You have 2 car payments? Making a list of your spending and look at how it has evolved over time will give you the answers to the question; do I suffer from lifestyle inflation?

In order to do it, you can use a free and simple excel spreadsheet or you can go the “more precise way” with budgeting software such as You Need A Budget ,Mint or Microsoft Money. They all have strengths and weaknesses and the purpose of this post is not to review them. However, having budgeting software will allow you to set alarm when you are about to spend too much in a specific spending category or to few the overall picture with graphs and pie charts.  I used Microsoft Money for 2 years before I felt that my budget was “under control”.

Step#2: Consolidate your debt and free up cash flow

Once you have played around with your budget, you know exactly where you need to adjust in order to free up some cash flow to slow down your lifestyle inflation. Another way to ease your payment schedule is to consider consolidating your debt. You can do it through several alternatives:

- remortgage your house

- consolidation loan

- consolidate through a balance transfer credit card (only if you are expecting a huge entry of money in the upcoming months).

The key point here is to liberate money that was used towards paying down debt and to save it to build your retirement portfolio. If you treat your savings as one of your creditor (Pay-yourself-first approach), you will definitely achieve your goals. So consolidate your debt, cut some expenses and use this amount of money in your budget to establish an investment plan.

Step#3: Start a savings plan

We have been discussing retirement planning and investing since the very beginning of DoNotWait. Now it’s time to establish your investor profile and select the right type of investment according to your financial situation, risk tolerance and investment horizon. I know that there is a lot of investment advisor bashing in different blogs but I still think that if you take the time, you will be able to find a good financial advisor that will lead your way to a wealthy retirement.

We will discuss the savings plan at a later time since there is much to talk about.

Step#4: Income Increase = Saving Increase

Each time you make more money and every time you finish paying off a debt, you should think about increasing your savings. This totally goes against the lifestyle inflation principle and will prevent you from a lot of headaches! It is very tempting to use your bonus or your latest increase to buy something new in the house or go on an expensive vacation. However, by doing that, you are postponing your retirement plan.

Since I assume you are already living comfortably, all I suggest is to fight future lifestyle inflation opportunities by using extra cash towards your retirement plan.

Step#5: Rinse and repeat each year

You think you are done with lifestyle inflation? You are wrong! I thought I was controlling my lifestyle costs until I dropped my budget software and started to enjoy life. After a while, I realized that I had increased my lifestyle but not my savings. Fortunately for me, I noticed the inflation before it becomes a serious infection. The only way I figured how to control lifestyle inflation is by doing these 4 steps annually. Take a rainy Sunday and dive into your personal finances. Analyze your spending, make sure your savings are on target and look at potential income increases or expenses that may come over the next year. This will help you control your lifestyle inflation.

What are your tricks to avoid lifestyle inflation?

Do you keep track of your expenses? Do you pay yourself first? Do you have any tricks to make sure you avoid the pitfalls of debt?

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8 Responses to Avoiding Lifestyle Inflation To Retire Wealthy

  1. Good points Mike. My wife and try to curb lifestyle inflation by having a portion of our paychecks go directly into long term savings. We did what you mentioned in step 4 and the savings keep building. It’s easy to get a pay raise and then buy more stuff – but if you set that raise aside, you can really see a difference in your net worth.


  2. You summed it up well in five steps. A savings plan is one most important thing my wife and I decided early on in our marriage. That and our frugality somehow helped us in our retirement. Now we’re settled in a cozy retirement neighborhood at Alden Place in Cornwall, PA.

  3. Currently, I’m battling with lifestyle inflation.

    I think the motivation for me lately has been European or Hawaiian vacation next year. That has enabled me to regain my focus on the numbers.

    So I think if you create a savings goal and have every penny count, it’s easier to control lifestyle inflation.

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  5. Great points! My husband and I finished graduate school a few years ago, where we lived on a pittance. Now we are watching ourselves and all our friends experience quite a bit of lifestyle inflation as we all move into well-paying jobs. It’s such a shame! We all lived perfectly happily (if sarcastic about meager circumstances at times) on our small stipends, and now it seems everyone needs an expensive condo with upgrades to be happy. (Spoiler alert: no one is substantially happier after purchasing the expensive condo with upgrades! Hubby and I are still in a two-bedroom rental, and we’re no less happy, except when our cats meow at the door and we have no outdoor space for them to play in).

    We auto-save and pay ourselves first, try to pare down our stuff on a regular basis (to avoid wanting more space simply because we have more stuff), and try to always be looking for new, low cost hobbies. The low cost hobbies are fabulous because they serve as something new and novel, and probalby keep us from buying stuff just for the new and novel effect. Right now the new and novel hobby is gymnastics. We take an adult gymnastics class once a week at a local gym, and it is tons of fun, even though we are basically stuck at cartwheels! We end up all week talking about it, practicing our seriously weak skills, and so on. I imagine we could easily insert something much more expensive (like new gadgets or cars or something) and have the exact same experience in terms of novel expression. We’re doing it for a little $10 class instead, which works perfectly for us. (and incidentally, our strength and flexibility as well)

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