Lifestyle Inflation

The lifestyle inflation or lifestyle inflation occurs when the level of income increases but so do expenses; in other words, we continue to save the same amount or even less than before our income increased. In other words, we would be living beyond our means.

How do I know if it's happening to me? It's normal to think that this wouldn't happen to us, even to say that if we won the lottery, we wouldn't squander it and wouldn't change our lifestyle. The truth is that experts point out that the key is that what was once seen as unattainable or unnecessary eventually becomes indispensable. It's easy to say it won't happen to us, but difficult to stick to it when it really matters. The fact that increasing income usually comes hand in hand with indulging in some luxuries, which gradually become normalized and cease to be a whim to become essential. For example: eating out more often than usual, going on trips, buying a better car, or moving to a new house. Suddenly one day you realize that you no longer care about supermarket prices if it's close to your home, you have several coffees out per day, you don't take advantage of sales to buy clothes..., when before that salary increase, that mindset was far from yours. It's almost imperceptible, as the increase in expenses tends to be gradual, but it's these details that help us analyze if we've fallen into the trap of lifestyle inflation. If our income level increases, but so does the level of expenses, we should act as soon as possible and reconsider our savings level by reducing unnecessary expenses.

The increase in expenses and its effect on retirement Lifestyle inflation becomes especially relevant when we have a saving or investment strategy for retirement: if we don't adapt the new economic situation to this strategy, we have a problem. We would be allocating surplus money to liabilities instead of growing our wealth. If we want to achieve financial freedom, at any level, its relevance will be much greater. Given the current uncertainty in the public pension system, we should be conservative and not rely on such a pension in our retirement plans, especially younger people. Assuming the absence of a state pension, and therefore a specific retirement age, it is estimated that to maintain the same standard of living as before, you need to have saved 25 times the amount of your annual expenses. What measures should I take to avoid lifestyle inflation?

• Keep an annual balance of savings and expenses and analyze it frequently, taking into account inflation and salary increases.
• Follow a savings plan disciplinedly: you can develop your own or use known methodologies, such as the Kakebo method.
• Analyze possible changes in routines and their effect on spending.
  • Remember when you were a student or just moved out on your own and how happy you were with very little. Surely many of the expenses you have now can be optimized, or even eliminated. This doesn't mean you become stingy, but that it's worth analyzing if your expenses are reasonable. There are expenses that are dispensable (more than you thought) and others that are necessary. A treat once in a while is deserved by everyone and positively influences motivation.

• Seek experiences over material things: the happiness it brings will be much greater. We could say these are investments rather than purchases or expenses. Compare the opportunity cost it represents for you.
• Don't compare yourself to others. No matter what your surroundings do, their financial habits being unhealthy doesn't mean yours have to be the same.

What to do with an increase in my income? Experts recommend not spending more than half of the income increase to avoid affecting your financial plan for the future. The higher the initial savings rate, the greater proportion of the income increase you should save. Said like that, without processing it, it doesn't make much sense, but let's analyze it in detail. A person who saves less than another with the same income spends more, logically. If after the income increase, both people decide to spend the same percentage of the increase, it will affect the saver much more percentage-wise than the non-saver. Even if they spend the same percentage of the increase, the percentage of the spending level increases much more for the saver. Do you understand now the importance of the annual spending increase?