As paycheques rise, it's easy for Singaporean millenials to increase their spending to match. This is called lifestyle inflation - and it can do serious damage to your financial future.
The moment your first raise comes, you may start buying into the idea that you should upgrade your lifestyle as well. And why shouldn’t you? After all that hard work, doesn’t it make sense for you to graduate to better restaurants, designer labels, and newer smartphones?
On the other hand, you can’t let this mindset control how you mete out your regular expenses. This is where the problem of lifestyle inflation comes in.
What is Lifestyle Inflation?
If you got a $1,000 raise, it would make sense to save that $1,000 and maintain the same lifestyle you had. Unfortunately, it's an economic fact that as salaries increase, so does spending. With the rise in your income, things that used to be a luxury are now a necessity - especially when your friends are buying into it too.
This brings rise to a phenomenon called lifestyle inflation. As your spending increases with your salary, it becomes more difficult for you to save for retirement, climb out of debt, or reach other major financial goals.
The increased spending is not always drastic. Sometimes it can be as subtle as taking cabs instead of the train, spending hundreds to party during weekends, or getting pricey spa and gym memberships. Whatever way you choose to spend your growing income, lifestyle inflation causes you to live paycheque to paycheque, leaving you without cash if an unforeseen event happens - such as losing your job.
4 Ways to Avoid the Lifestyle Inflation Trap
There’s nothing inherently wrong with treating yourself every now and then. The problem starts when these “upgrades” to your quality of life outpace your earning power. Luckily, there are ways to prevent lifestyle inflation from taking over and ruining your financial future.
Choose Your Friends Well
The most effective method of keeping lifestyle inflation at bay is addressing its root causes. According to Investopedia, a major cause of lifestyle inflation is the “keeping-up-with-the-Joneses” mentality — maintaining a lifestyle for the sake of projecting a subconscious image to others. It may be hard to let go of friends you've known since primary school, but if you feel the need to keep up and impress them, they may not be the best people to have in your life. Authentic friendship begins with accepting who you are and where you are financially, without being pressured to live beyond your means.
Create a Realistic Budget
It goes without saying that a budget can keep your lifestyle in check. A good budget to follow is the 50 - 30 - 20 rule:
- Use 50% of your income on fixed monthly costs, like bills, mortgage, or car payments. You can also include gym memberships and mobile phone subscriptions. Anything that's a fixed monthly cost should make up half of your income.
- Place 20% of your income into contributions that will build your financial future. Ideally, 10% should go into an emergency fund, and 10% should be saved for your retirement.
- Use no more than 30% of your income on everyday expenses like transportation, food, hobbies, entertainment, etc.
Save Half of Your Bonus
It's easier to save money you aren't used to spending. If you're still living with your parents with few monthly expenses to meet, a quick way to avoid lifestyle inflation is to save half your bonus or raise. Take it one step further and invest in a mutual fund, index fund, or exchange traded fund so your wealth actually grows. By doing this, you still get to enjoy the fruits of your hard-earned labor while staying mindful about your future.
Keep Some Fun Money
There's nothing wrong with indulging in frivolous purchases when it's done in moderation. The best way to do this without blowing through your whole paycheque is to budget for fun. Commit around 10% of your everyday budget to go towards a completely indulgent purchase, and decide if you want to splurge now or save it for something bigger.
Your goal should not be to win the Austerity Olympics, but to maintain a lifestyle that is both comfortable and sustainable. By keeping lifestyle inflation at bay, you have a better chance of achieving financial freedom and chasing your dreams without having to worry about money.
Use SingSaver.com.sg's free comparison tool to find the best credit cards that will help you save money while you enjoy the good life.
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