Lifestyle inflation – Why pay rises don’t make you wealthier

Conventional wisdom dictates that you work hard, continually get promoted throughout your career, and get richer as a result. However, it doesn’t always work out that way. This blog will explore what is meant by, and the danger of, lifestyle inflation, the difference between being rich and wealthy and how you can defend yourself from lifestyle inflation.

What is lifestyle inflation?

Quite simply, lifestyle inflation occurs when your lifestyle becomes more expensive over time in line with your increasing income.

Whilst this trend is perfectly normal and should to a degree be encouraged, there are associated dangers.

When your income level increases, you will often feel the desire or the freedom to treat yourself, which is completely OK. However, if at the start of your career, you live pay-cheque to pay-cheque, this habit can be hard to shake.

If you continue to empty your bank account each month, even after you’ve gained promotions and pay rises, you are at risk of suffering from lifestyle inflation. As pay rises are often small and incremental, it can be easy to add small everyday purchases to your expenditure without realising your outgoings are increasing dramatically over time.

A study by GoBankingRates found that 69% of Americans have less than $1,000 in their savings, and even families earning upwards of 500k a year can still end up with little or no money saved for emergencies. The reason may be lifestyle inflation: many people choose not to put away any extra because constantly they’re purchasing new things instead.

Those who suffer from chronic lifestyle inflation will visualise all surplus income as disposable income. This is especially an issue for people who do not pay into an automatic pension scheme, as often 100% of their income will be spent each year without accumulating any wealth.

“A high income makes you rich, but not wealthy.”

According to Robert Kiyosaki, the amount of money you earn can make you rich; it does not, however, make you wealthy. Kiyosaki believes being rich is categorised by your income bracket. However, wealth is how long you can survive without income.

For example, a person who earns $180,000 per annum can be classified as rich. However, if their expenditure amounts to $160,000 per annum, they will be unable to survive for long without that income. In Kiyosaki’s eyes, wealth is measured in the amount of income-generating assets you own. These can be rental incomes from real-estate, dividend and interest payments from investment portfolios, or revenues from online assets.

The list of potential income-generating assets is a long one. To become wealthy, according to Kiyosaki, the purchasing of these types of assets should be prioritised.

Stop trying to keep up with the Joneses

In the modern, social media-dominated world, it can be difficult to avoid the temptation to try and match your peers in terms of spending. This phenomenon is known as “keeping up with the Joneses”. When you see people going on expensive trips, buying flashy cars or splashing out on lavish dinners, you may feel as if you’re lagging behind them.

Don’t worry! A person’s social media is showing you exactly how they wish to be seen. It doesn’t show the more important things such as their bank balance or mental health. Focus on yourself and your own personal goals, avoid trying to seek approval from others by impressing them.

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