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Earning more but getting poorer

The paradox of lifestyle inflation

Do you remember the days when as a student you were comfortable living on beans on toast, using affordably priced cosmetic brands and saving your money for a Saturday night out wearing your favorite High Street jeans? If you ever thought ‘those were the days’ then you are probably right. Chances are you were financially better off back then than you are now. Surprised? Allow me to introduce lifestyle inflation.

Lifestyle inflation is the tendency to spend more as your income increases. It’s not just buying pricier items, but buying more things in general. There are several reasons why people do this, ranging from the desire to prove their status or keep up with peers to feelings of entitlement or deservedness towards items that they can now afford to buy.

Simply put, people do it because they can. Or at least they think they do while the rise of 0% credit cards and low interest personal loans helps to keep that illusion alive.

Of course everyone is free to make their own choices when it comes to what they spend their money on, but the problem with lifestyle inflation is that it creeps up on us gradually until we reach a point where an increase in income won’t actually make much of a difference to the amount we can save or invest. Imagine earning more and more and still not being able to afford to buy a house. Or to only afford it ‘on paper’ but to not actually be able to make the monthly payments.

What is even worse, the illusion of affordability can actually drive us to create more debt via credit cards and overdrafts. This underlines the paradox of lifestyle inflation: the more you earn, the poorer you get.

You might think that this is an exaggeration but I have encountered it too many times: people who, due to using several debit and credit cards with different clearing dates, could not easily see that the balance of their financial situation was negative and that their debt was growing consistently over time.

However, enough about the depressing details of lifestyle inflation. The question I want to tackle is: how can we overcome it or at least minimize its effects?

Awareness

The first step towards overcoming anything is to become aware that it’s happening. There are multiple clues that can hint towards it but I found these three to be the most common:

1. ‘I deserve it’ replacing ‘I need it’ as the reason behind a purchase.

2. Having to consistently increase the limit on your credit card

3. Making automatic purchases (this can include renewals of subscriptions) without questioning the value that those products or services bring you

Identifying the main ‘offenders’

Once you become aware of the issue you can then move on to identify the ‘biggest’ offenders.

You risk becoming overwhelmed if you try to tackle everything all at once. So look for the 20% of your purchasing behavior that contributes 80% of the ‘damage’.

Some ‘offenders’ might be obvious at a first glance at your bank statements, like buying designer items every few weeks. Other purchasing behavior might not come in large chunks of expenditure but in smaller patterns that add up to a lot. Take your time to do this step properly.

The triple E principle: estimate, evaluate, eliminate

After identifying the main ‘offenders’, estimate the impact that each of them has on your budget and rank them in descending order. Start questioning those purchasing behaviors and, depending on this evaluation, decide if you are going to eliminate a certain behavior or at least try to contain in within certain limits.

You will notice that when you first do this exercise everything will seem like a conscious choice. This is why it is so important to know how to link your purchasing behavior with your values and use the latter to evaluate a buying decision. I have written an article about how to do this, you can read it here.

Best of luck with finding the ‘offenders’ and minimizing the damage. As always, if you need any guidance or support please contact me on LinkedIn or via email at [email protected].

Originally published at www.linkedin.com

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