Avoid This Trap If You Want Financial Independence

Congratulations, you’ve just gotten a pay raise or a bonus! After years of hard work, you can finally indulge in luxuries you were previously unable to afford. That item you’ve always wanted. That trip you’ve never been able to afford. However, you’ll soon realize that you’ve fallen for the trap known as lifestyle inflation.

What is Lifestyle Inflation?

Lifestyle Inflation is the reason why a couple making $500,000 a year can feel “broke”. Simply put, the more you earn, the more you spend. Lifestyle Inflation happens when you incorporate previously unaffordable luxuries into your upgraded lifestyle as essentials. You may feel that “you deserve it” or that “you can afford it, so why not?” rather than using the opportunity to save or invest. Just because you can rent a HK$31,000 (US$4000) apartment, doesn’t mean you should. 

The Consequences of Lifestyle Inflation

Lifestyle Inflation can be a real threat to your long term goals. Spending a few hundred dollars here, a few hundred dollars there can quickly add up and keep you from building up your savings. If you don’t save or invest your extra money, you may be forced to work even harder than before to keep up your luxurious lifestyle. Therefore, it will take longer to achieve financial independence, possibly delaying your retirement or leaving you with less than you anticipated. 

Why We Spend More 

In order to combat Lifestyle Inflation, we first need to understand why we spend more. Humans are hardwired for instant gratification as well as endless wants and desires. Once we achieve a certain goal, no matter whether it’s materialistic or achievement-based, we strive for the next goal. It’s just human nature. 

Furthermore, in the age of technology, digital marketing experts estimate we are exposed to 4000-10,000 advertisements a day, increasing our exposure to excuses to spend money. Our brain tricks us into believing that the instant gratification of a purchase will satisfy you. However, it won’t take long for the high to subside and leave you looking for your next purchase. It’s the reason why our happiness from buying a new phone, or a new designer bag etc fades quickly. We adapt to our new favourable situation and upgrade our baseline for happiness

How to Beat Lifestyle Inflation

• Reward Yourself Wisely 

I’m not saying you shouldn’t reward yourself. It’s perfectly normal to want to treat yourself, however, the trick is to be strategic about it. As mentioned before, we are hardwired for instant gratification, so we should aim for delayed gratification instead. Whenever you’re about to make an impulse purchase, stop and ask yourself if that item will make you happy in 2 or 3 years. If we adopt this mindset we could avoid unnecessary purchases that may hinder your road to financial independence. 

• Budgeting

The only way to truly understand and change the way you spend money is by tracking how and when you spend money. Making a budget and intentionally choosing where you spend your money allows you to meet your financial goals quicker. You may also be able to cut back on some unnecessary expenses!

• Pay Yourself First 

At the beginning of every month, it is crucial to allocate funds to your savings/investments before you spend money on anything else. If you don’t, the extra income will be easily absorbed into your lifestyle. By saving first, the extra money you’ve earned will be directed towards achieving your financial goals. If you were able to survive with your old budget, you shouldn’t need to touch your extra income. 

• Surround Yourself with Like-Minded People

Sometimes we make decisions not based on ourselves but based on the people around us. Therefore, if you surround yourself with people who like to spend money on new designer items, or HK$5000 bar tabs, then it will become very hard to avoid those unnecessary purchases. For example, if your friends want to make weekly happy hour plans at a fancy bar, even though you know it will be an expensive event, you may feel inclined to go as a way to be included. 

I’m not saying you should stop hanging out with your friends, but it is important you make decisions based on your needs. Be clear about your budget and don’t feel pressured going out to places you cannot afford. A true friend will want to see you achieve your financial goals, and won’t make you feel bad for skipping out on expensive events. 

Final Thoughts

After years of hard work, you deserve to treat yourself once in a while. After all, what’s the point in making money, if you’re not going to spend it? However, it is important we don’t spend above our means, we spend strategically, and we don’t lose sight of our goals. If your saving/investing rate isn’t keeping up with your rising expenses, you could end up worse off compared to when you earned less. If you implement these tips it can help keep lifestyle inflation away.