How Does Lifestyle Inflation Affect Me?

Receipt and Cash

The large amounts of money that our government has spent on pandemic relief and is proposing to spend on infrastructure projects has raised some serious concerns about inflation. With the country reopening, lifestyle inflation should be a more immediate concern for most.

After a year of lockdowns, canceled vacations, and missed celebrations, we’re all excited to enjoy life a bit more. Some of us have transitioned to new, more lucrative careers or are experiencing household budget surpluses due to staying home. These tips can manage your enthusiasm and cash flow, so you don’t do any long-term damage to your financial planning.

1. Review current expenses

Anytime your cash flow changes it’s a good time to review your budget — or start one.

Take a moment to step back to look at what you’re already spending each month before you reward yourself with new expenses or big-ticket purchases. With extra money coming in, you might have an easier time paying for that gym membership you never use or that motorcycle you never ride. That does not mean you should keep sinking money into those things. Decide what is important to you and economize in those areas that are not meaningful to you. This will allow you to spend money on things that you’ll enjoy more, like a couple of extra date nights with your spouse per month or a family trip.

Keeping a budget isn’t just about cutting back. It’s about making sure you’re getting the most out of your money and doing what is important to you.

2. Do the math

If treating yourself to a shiny new TV or a vacation you missed during the pandemic isn’t going to throw off your budget or drive up your credit card bills, then by all means, have some fun.

Where lifestyle inflation can really hit hard is when people just assume their new cash flow can cover new repeat expenses like extra carry-out meals every week, monthly charges for a couple new streaming subscriptions, or higher monthly payments on a new car. Paying a slightly higher insurance premium on a new car might not seem like a big deal until you realize you aren’t putting as much money into your emergency savings account as you used to.

The less dramatic the lifestyle change, the less you’re aware of the excess money you’re spending. The arrival of the monthly credit card statement will show you just how out of control your eating out habits have become!

One reason we resist crunching the numbers on new purchases is that we know the numbers might say “No” or “Not right now.” The joy you feel from pulling the trigger on an impulse purchase will be short-lived if you’re digging into your retirement savings to pay your mortgage next month.

3. Support your future self.

Speaking of retirement, the lifestyle that we’ll want in our golden years is usually the furthest thing from our minds when we’re thinking about installing a backyard pool or booking a spur-of-the-moment cruise. All the seemingly small financial decisions you make today add up and compound over time. Spending often leads to more spending. If that spending makes it harder for you to top off your IRA every year, the stuff you buy might be putting the safety and security of your 80-year-old self at risk.

Before you ramp up your lifestyle expenses to match your higher cash flow, look at the bigger picture. You want you to get the best life possible with the money you have today, tomorrow, and well into the future.

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