Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective

Creative Commons License photo figure credit: jonworth

The central tenet of personal finance is to spend less than you earn.  A close corollary to this is to learn to live with what you have.  If you can learn to be happy as things are, then it makes it easier and easier to save more and more as time goes by.  I wrote about these ideas in one of my first posts at this blog.

Last week, I found out that I am getting a raise to go along with a promotion that I got a couple of months ago.  The challenge with getting a raise is to keep the central tenet and the corollary in mind: don’t increase your standard of living, and put most of the raise to work for your future.  To do otherwise is what is commonly referred to as “lifestyle inflation.”

Lifestyle Inflation occurs when people continue to increase their standards of living as their means increase.  There is generally nothing wrong with enjoying a higher standard of living — if you can afford to.  Many people are already right on the edge, living paycheck to paycheck, and one unplanned expense away from financial disaster.  However, when these same people get a raise, they raise their standard of living so that they are now spending all of their new income, but are still continually on the edge of ruin.

There are two ways out of this cycle: spend less or earn more.  Most of us have a great deal of control over the former, and at least the perception of very little control over the latter.  In order to break out of the paycheck to paycheck paradigm we have to trim our budgets so that we have some money to save each paycheck, not succumb to lifestyle inflation, or do at least some combination of both.  (Of course, another easy way to avoid lifestyle inflation is to have your spouse get laid off in the same week that you receive your raise!)

Many people, especially in this economy, are lucky to be getting any raises at all, and those that are may still not be keeping up with inflation.  However, it still makes sense to me to try to forget about the raise when you get it and focus instead of how that extra money can be used to advance your financial plan: paying down debt, additional retirement savings, down payment fund, new car fund, emergency fund, college savings for the kids, increased charitable contributions, etc.

Another great strategy, if you can’t stomach the idea of never getting a raise is to split raises with yourself. While it may sound crazy, splitting raises with yourself will still allow you to enjoy some of the benefits of your newfound wealth, but also advance your overall financial plan.

Realizing that “stuff” doesn’t make you happy can be very empowering.  If you can forgo lifestyle inflation for an extended period of time, you can quickly get to a point where you are saving a substantial amount of your income.  I recently read a story about a couple who saved raises for 10 years (looking for a link, anyone have one?)  Imagine for a minute how early you could retire if you were saving 30% or more of your income.  Avoiding lifestyle inflation also offers more security: if you only need a fraction of your income for your base needs, layoffs and other economic crises will be far easier to weather.

Ultimately though, none of this matters if you don’t have a spending plan, don’t pay yourself first, and don’t track your spending.

Are you guilty of lifestyle inflation?  What do you do when you get a raise?  Let’s hear what you have to say in the Comments Section below!

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4 Responses to “Avoiding Lifestyle Inflation”

  1. Rachel Says:

    I’m guilty of lifestyle inflation, but it’s been slow. :)

    I agree with 90% of what you said (which is classic advice), but I’ll also point out that some lifestyle inflation is more dangerous than the rest. The more dangerous kind is the kind that incurs fixed expenses. The less dangerous kind is made of expenses that could be stopped at a moment’s notice if hard times come along. There’s an extensive analysis of this kind of thing in the book The Two-Income Trap — a book I can’t 100% recommend, but which does a good job on this particular topic.

  2. MITBeta Says:

    Rachel, that’s an excellent point. One can go out to dinner every night but not incur fixed expenses. But buying a boat is a whole different story, unless you pay cash.

  3. Matt Says:

    Congratulations on the raise! Nice yacht by the way. Must have been some raise.

  4. MITBeta Says:

    Thanks, Matt. But if you look closer, it’s the blue bumper that I bought.