Imagine this: you’ve just received your first pay check as a full-time employee. You’ve been diligently waiting for this moment, proving yourself to your employer and colleagues for months. Now, it’s time to treat yourself, right?
You spend this money on new clothes or a fresh haircut. You start eating out more. You might even join the gym. All the luxuries you couldn’t afford on a fresh grad pay check.
You wonder how you could have stayed broke for so long.
Welcome to the world of lifestyle inflation: the habit of upping your spendings as your earnings climb. And it’s not an ideal habit to have.
What’s the point of making more money if I can’t spend it?
Don’t get me wrong. There’s nothing wrong with wanting to spend your money, especially to improve the quality of your life. But it’s more about striking that balance between planning for your future and enjoying the fruits of your labour right now.
What happens if you don’t find this balance? You might actually end up in a cycle of living pay check to pay check. It causes you to have just enough money to last you to the end of the month. You might even find it difficult to pay off your debts because of this.
How do I know if I have lifestyle inflation?
Here's a heads-up on whether you're veering towards lifestyle inflation:
Credit card debt
If your credit card's burning up with debt, yet you're still living large with daily Grabs and monthly splurges, you might want to hit the brakes.
Lack of safety net
Do you have any cash to fall back on should anything happen to you? Like, an unexpected trip to the hospital or sudden unemployment?
It’s not really for you
Think about whether you're buying things because they make you happy or just to impress others.
How do I avoid lifestyle inflation and still enjoy life?
Don’t lose motivation just yet, it is possible to enjoy life to the fullest while still setting money aside for your future. Here’s how:
1. Calculate the real change
You’ll actually find that the net effect of your raise is less significant than it appears. This happens because a portion of your money is going to EPF and taxes. Do the math to see what you're really working with.
2. Think about the hidden costs
If you can afford the down payment for a car, don’t forget the ongoing expenses that come with it - gas, maintenance, insurance and road tax. The costs don't just end there.
3. Be mindful when spending money
Create a budget that forces you to spend within your means. Unfortunately, this includes all your retail therapy too.
4. Start building that emergency fund
Resist the urge to blow that extra cash. Aim to tuck away 20% of your income into a no-touch account.
5. Invest in experiences
Can't justify the costs of a new car? Opt for travel instead. Cuti-cuti Malaysia counts too! The memories and shared experiences often outweigh material possessions in the happiness department.
The bottom line
It's important to manage your money wisely as you start earning more. This means enjoying your earnings while also saving for the future. By being careful with your spending and focusing on what truly makes you happy, you can avoid the trap of lifestyle inflation.