Lifestyle inflation

CONGRATULATIONS! You have finally gotten that promotion you have been working so hard for, and with that promotion your salary package has increased. An increase in one's income is worth celebrating (who does not like more disposable income?). However, when your income increases you need to be careful about lifestyle inflation.

As you climb the corporate ladder and advance in your career, your income will rise but your expenses are likely to increase as well. Lifestyle inflation happens when you allow your spending to gradually increase in pursuit of a more affluent lifestyle. It usually happens when your income increases over time, and you increase your spending at the same pace with that rising income. Lifestyle inflation, also known as lifestyle creep, is one subtle yet significant thing that can inhibit you on your journey to wealth creation. Many people will contemplate how to maximise returns but fail to consider how small, incremental increases in spending habits can erode their financial position.

It is natural to want to treat yourself, and as your situation changes it can call for increased spending. A new promotion or a change in position may mean you have to upgrade your work wardrobe. Getting married and having children will also affect your financial situation. As your professional and personal life evolves, some amount of lifestyle inflation is expected. What is key is how you navigate and manage these situations. The correct mindset will ensure your financial habits are sound and work in tandem with your lifestyle.

As always, a budget is key. Have a financial plan and before spending, think to yourself: Is this a need or a want? Sticking to your financial plan will ensure you are intentional when spending. Carefully note what are your essential expenses and pay these first. Set up standing orders so those are always taken care of, then with your balance remaining work towards your financial goals.

Once you have paid the essentials, consider not only saving but investing. Some schools of thought are that you should pay yourself first — in other words put aside for saving and investing even before expenses. But if you have a budget and are a disciplined person you can deal with expenses first and then saving and investing after.

When it comes to investing there are several vehicles that can be used at this point. One option you can consider is investing in stocks that pay dividends. You will have the gratification of additional income from your dividend payments, and you can then choose to spend your dividend payments or reinvest. Another option would be to invest in mutual funds. You can research which mutual funds work best for your financial goal and risk appetite. If you invest your money wisely and you do not have easy access to the funds, you are less likely to spend on frivolous items.

Always remember that your current lifestyle will affect your retirement lifestyle. Your savings now may not afford you the same lifestyle in the future. Do not fall into the trap of trying to upgrade your life all at once. Gradually work in big-ticket items and calculate if the rise in your income can accommodate the additional spend. Finding the balance between the planned occasional splurge and putting your hard-earned money into savings and investments will keep you on track for financial success. Successfully managing your money will help you avoid lifestyle inflation before it manages you.

Christine Rankine is the manager, personal financial planning at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm

Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at info@sterlingasset.net.jm.

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