One of the first rules of personal finance is to avoid lifestyle inflation. That means instead of finding reasons to spend more when you start earning more, you should live the way you’ve been living and bank the extra bucks.
However, Gates Little, a 30-year financial professional and CEO of altLINE at the Southern Bank Company, thinks the culture could benefit from a different perspective.
“The consensus around ‘lifestyle creep’ is a pretty sad way to look at success, to be honest,” he said. “If you finally figure out a way to work hard and succeed, your first or even second thought shouldn’t be, ‘Oh, I better stay small and rein in my spending.’ Why can’t this new level be sustainable for you? Why can’t you do even better? There’s an attitude issue that reflects poorly on us there, I think.”
Gates believes that “budgeting is for everyone, no matter your income level” and that “it’s OK to increase your spending with your salary wherever you like as long as you’re budgeting the expense accordingly.”
GOBankingRates spoke with two financial planning experts who agree with Gates’ assessment that raises followed by splurges aren’t always a cause for concern. One explained how you know you’re clear to take some financial liberties, and the other identified what you should spend more on when you do.
It’s OK To Let Your Hair Down Once You Pay Your Bills, Taxes, Yourself and Your Future
Tim Smith, who has spent 38 years as a financial planner, is the CEO of boutique financial services platform Aurora Private Wealth and the founder of The Financial Dad, which provides financial literacy education for high schools, colleges and young adults. To him, it’s all about having your bases covered before you go shopping.
“Yes, it’s OK to spend more if you are on target for the following things,” he said. “Saving money for retirement, saving money for your kid’s college, having an emergency fund and covering insurance necessities to meet all your financial planning goals.”
Remember, your financial targets for your emergency fund, retirement savings and the rest should grow with your income. But once you meet those targets, there is no shame in enjoying the fruits of your success.
“If you’ve done all that, then why wouldn’t you enjoy the benefits of your labor to spend on your lifestyle?” said Smith. “However, if you’re in debt and have no savings for college or retirement, that is the time to channel all your new extra cash flow towards debt reduction. There are no hard-and-fast rules for financial planning. It’s all situational, based on the person, their income, their debt, and, of course, their goals.”
4 Times That More Is Usually Better
As a finance, economics, and accounting professor at the City University of New York and the head of growth at Awning, Dennis Shirshikov has seen financial goals foiled when spending rises faster than wages. But he also knows that some strategically targeted lifestyle inflation doesn’t have to be the bane of financial wellness.
Here when you know it’s probably fine to spend a little more than before you got that raise.
A raise can justify increased spending if you replace a car, couch, fridge or some other big-ticket necessity with a pricier version that enriches your life quality and lasts longer without the need for replacement.
“It’s a balance between upgrading for comfort and utility without splurging on luxury items that quickly depreciate,” said Shirshikov.
“Health is wealth,” as the expression goes. However, in a country where there’s a direct correlation between income and health outcomes, maybe it should be the other way around. Either way, wellness is for sale — if you can afford it, buy it.
“It’s reasonable to spend more on quality healthcare, wholesome food and fitness facilities or programs as your income grows,” said Shirshikov. “These expenditures contribute directly to your well-being and, by extension, your productivity and ability to earn.”
Any expenditure that pays social, professional or financial dividends is an investment — and self-improvement might be the most worthwhile investment of all.
“Investing in further education or professional development courses can directly impact your earning potential,” said Shirshikov. “It’s a forward-looking approach to spending that aims to secure better financial stability. In my early career, I allocated a portion of my increased earnings toward an advanced certification, which significantly broadened my career prospects and earning potential.”
As your net worth and assets grow, so do your liabilities. That means you should be increasing your coverage with more expensive premiums.
“As you climb the income ladder, safeguarding your assets and future earning potential through adequate insurance coverage becomes crucial,” said Shirshikov. “It’s sensible to allocate part of your increased income towards comprehensive insurance coverage. I often advise individuals to reassess their insurance needs with every significant income increase to ensure they are well-protected against unforeseen circumstances.”
All four categories share one commonality.
“In all these scenarios, the common thread is the long-term value or security that these spending avenues provide,” said Shirshikov. “It’s not about living lavishly because you now earn more. It’s about making thoughtful decisions that will continue to benefit you financially.”
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