Does your spending increase every time your salary increases?

You receive an increment, and then you start making big purchases. This is lifestyle inflation. Lifestyle inflation refers to the increase in expenses that occurs when your salary rises. These expenses are generally wants and lifestyle needs.

However, if you don't adjust your lifestyle expenses as your income increases, you will be able to reach your financial goals more quickly. And if you want to achieve financial freedom and generate passive income from your investments, avoiding lifestyle inflation is crucial.

Here are some steps that can help you avoid lifestyle inflation:

Figure Out If Your Income Increment Is Beating the Inflation Rate

Before you make any significant changes to your lifestyle, you can determine if the increase aligns with the general inflation rate. This is something that many people overlook. If your income increases and your rent and other utilities increase by the same amount or even more, it might not be wise to make any dramatic changes in your lifestyle. It might lead to debt or insufficient savings.

Understand What Is Prompting You to Spend Money on Lifestyle Needs

Most people don't spend more just because they want "stuff."

Sometimes, it's emotional. Growing up, you couldn't have certain things. So now, as a working adult, you want to give yourself everything you couldn't afford back then.

Or maybe you're trying to prove something to your family, to society, to your old school friends by buying a fancier car, a bigger apartment,  branded clothes or international vacations.

And if your spending is driven by emotional needs or social pressure, no salary will ever feel enough.

Before anything else, ask yourself:

• Why do I feel the need to spend more?
• Am I doing it for myself and my family, or is it for someone else's approval?

Once you figure this out, it will be easier to avoid or escape the vicious cycle of lifestyle inflation.

Don't Let Every Raise Mean a Lifestyle Upgrade

A higher income doesn't mean you have to upgrade everything.

Yes, enjoy it a little. You have earned it. However, don't spend it all.

Instead, you can match your SIP to your raise.

If you got a 10% raise, you can enjoy it for a month or two, and then you can increase your SIPs. That way, you're not just earning more, you're investing more as well.

However, many investors, especially DIY investors, fail to review their investments or increase their SIP contributions every year. In that case, you can opt for the Top SIP option, where you set up a percentage increase for your SIP every year, and your SIP will be topped up automatically each year. You can set a modest top-up SIP percentage based on your expected annual income increase.

Balance Financial Goals and Lifestyle Expenses

Without clear financial goals, it's easy to get distracted. When you have a goal, every money decision becomes easier.

But don't go to the other extreme either. If you feel like you're working hard but not enjoying life, that's demotivating too.

So here's the balance:

• Figure out the areas where you want to spend money. It can be trips, clothes, bags, shoes or anything that gives you pleasure and makes you feel good. Doing this will help you to focus on one aspect and ignore the rest.
• Know how much you can spend on it without disturbing your financial goals. If you calculated that you can easily spend 5% or 10% more after the increment, you can earmark that amount for your lifestyle purchases.

This will ensure that you reach your goals faster and enjoy your life as well.

Also Read: Beyond Numbers: Charting the Course of Financial Excellence

Don't Let Weekends Burn a Hole in Your Wallet

A lot of people spend the most money over weekends, and it is not because they need anything, but because they're bored or want to feel good after a long week.

If eating out or shopping is the only way you unwind, your expenses will keep piling up.

Having hobbies that you enjoy doing with your partner, friends, or even by yourself, or taking classes over the weekends that can help you progress in your life or connect with like-minded people, can immensely help in cutting down unwanted expenses.

When your weekends feel meaningful, you will stop buying things too often.

Conclusion

Lifestyle inflation can impact the best of us, but the solution isn't being frugal. It is about being aware of your emotions and balancing expenses in such a way that helps you stay motivated and reach your financial goals as well.

About the Author

Amit Suri is a Certified Financial Planner and the Founder of AUM Wealth, one of India’s top-performing mutual fund distribution firms. With over 20 years of experience, he has helped more than 2,000 families achieve their financial goals through a deep-rooted belief in purpose-driven advisory. A second-generation financial advisor, Amit combines personal insight with professional expertise, holding credentials from the Financial Planning Standards Board (USA), the Kinder Institute of Life Planning, and an MBA in Finance.