Avoiding "Lifestyle Inflation" After a Pay Raise by Saagar Gupta

Pay raises are inevitable as careers progress. Earning more money is generally a positive accomplishment, but it can lead to “lifestyle inflation.” This is the idea that you’re bound to spend more money if you make more money.

Celebrities, professional athletes and lottery winners are prime examples of lifestyle inflation. Bankruptcy stories are just one example of the potential downfalls. They're proof that having more money in your pocket doesn’t necessarily mean you’re more financially stable.

Living within your means sometimes means resisting temptation. When you begin earning more money each week, keep these tips in mind.

Keep Everything Organized

Before you begin spending your money, be sure that you have a plan. Do you have debt you could pay off with the extra income? Do you have a savings plan for your retirement? Should you invest? There is no harm in treating yourself on occasion, but be sure that you’re putting money toward the necessities, as well. Creating a budget sheet is the best way to ensure that you’re living within your means and allocating your finances wisely.

Only Fix What's Broken
So, you now have extra money every month for a luxury SUV, new home, etc. Before making such a large purchase, ask yourself if the added luxury will be worth the money you’re spending. For some, the answer is yes. For others, the money could be spent more practically. Identify what expenses are “wants” and which are “needs” to find a balance between enjoying the conveniences of life and digging yourself into a financial hole that you'll have to dig yourself out of.

Know Your Options
If you’re interested in investing your additional income, you’re not alone. Investing extra capital you may have in the stock market has historically provided better returns than leaving the same money in a bank account (over the long term). To get a better feel for the current market, do research on your own or speak with an investment advisor. Keep in mind that investing in the stock market does carry additional risks, and the market direction changes often, so you want to have up-to-date information on any potential investments that you are looking to make.

Another option could be investing in a 401k. More than 50 million workers participate in their employers’ 401k programs. In fact, retirement assets represent 18% of all retirement assets in the U.S. When you invest in a 401k program, you reap numerous tax benefits. The amount you contribute to your 401k is exempt from federal income tax, lowering your taxable income. Additionally, you’ll likely pay fewer taxes on 401k withdrawals because you’ll be in a lower tax bracket after retirement.

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Disclaimer: This post is only made available for educational purposes. It is designed to give visitors general information and a general understanding of select financial topics. It is not intended to provide specific financial or investment advice. Conduct your own due diligence or consult a licensed financial advisor/broker before making any and all financial/investment decisions.