You’re doing well, earning a good salary. But somewhere around the latter part of the month, after you’ve paid your obligations and basically lived your life, which isn’t extravagant, you look at your checking and savings accounts and well, there isn’t much there. And that sinking feeling starts to kick in. Sound familiar?
This is called lifestyle inflation. In a nutshell, the way you spend increases over time in relation to your rising income, so your financial floor rises right along with it. In fact, according to a Federal Reserve Survey of Consumer Finances, households that earn between $100,000 and $200,000 are in sizeable credit card debt, have retirement accounts that need help, and very little savings in relation to their income. What to do? Here are a few ways to get a handle on this.
Get a real number. You might have all your expenses in QuickBooks or the like and, on paper, you look good. But to get a real picture of how you’re doing, calculate the expected net worth you should have for someone at your age with your salary: Multiply your age by your salary, then divide it by ten. If your net worth is below half that number, something’s not adding up. Pun intended. The next, critical step: Subtract your liabilities from your assets. This might not feel good, but from this you’ll instantly see what you can affect, and change.
Pinpoint the source of your lifestyle inflation. It might not be huge expenses, but little pricey purchases over time that are causing you to feel financially squeezed. Go to your spreadsheet and take a look at the last three years and compare. See where you’ve spent more, calculate the difference and there’s your answer. Areas to consider are housing, dining, subscriptions and services, travel, gifts, clothing, etc. Don’t make drastic changes all at once, as you might rebound and splurge. Just try to reduce your spending in the areas with the biggest deltas. Give yourself 60 days. Easy does it for lasting change. This might be a smart mantra.
Set up intentional constraints in certain areas. As mentioned above, you don’t need to become a fiscal conservative. Just look at the areas where things feel a bit…much. Here are three principles to work with:
- Decide on savings and investment allocations for payday. There are non-negotiables you can put on auto-draft. If you don’t see it, you won’t miss it.
- Determine a set number for each category. But approach these numbers as conscious decisions, not as a way to restrict yourself. You’re choosing not to spend $500 on dinner each week because in relation to the rest of your goals, this makes sense.
- Set up a discretionary account. You know, fun money. This is a fixed monthly transfer amount without overdraft protection. When the money’s gone, it’s gone. This isn’t a way to frustrate or shame yourself; you just have a real window into what you’re spending, rather than some vague notion. This creates real clarity.
Reimagine your social spending. We’re talking dinners out with friends, group trips or even the things that just feel normal like wedding and birthday gifts. This might be the hardest part of all. So here’s a tip: Don’t let these things sneak up on you. Plan for these events in advance and give yourself a price range to stay within. This way, you stay on track and don’t miss out on important moments.
The truth is that your income might well continue to increase. You’ll get that raise and bonus. So instead of living it up and spending with wild abandon, try this: for every raise or bonus, put at least 50 percent of the net increase toward savings or investments before changing anything about your lifestyle, i.e. buying that new car, etc. The other 50 percent? Make intentional choices about how you want to spend. Conscious decisions pay off in the long run. And best of all, you won’t continue to feel broke.
