Lifestyle Inflation Can Make You Broke (Even With a High Income) — How To Not Fall Into the Trap
You have an amazing job with great benefits. So does your significant other, and together, you make well over six figures a year. So why are you living paycheck to paycheck with little to nothing in the bank at the end of the month?
Matthew Grishman, a principal and wealth advisor at Gebhardt Group Inc., knows why. He once lived like that.
Grishman tells the story of how he earned $22,000 in 1995 as a stockbroker in his first job. He squeaked by paying the bills, and he wished he had money left over for a weekend splurge or to buy things the way his friends did. He dreamed of a raise.
A year later, he got that next job and a $3,000-a-year salary increase. Then he got the next raise. And the next raise. And he bought all those things he wanted.
“With each pay raise came rewards: a nicer car, a bigger house, fancier suits, more expensive meals; all the necessities for keeping up with everyone around me,” he said. “By the time I was 33 years old, my pay had increased over 2,000 percent from my initial $22,000 salary and my lifestyle had certainly reflected the massive pay increase over time. I wasn’t just keeping up with the Joneses; it felt more like I was Mr. Jones himself.”
He still spent like that 22-year-old. He had enough money to pay the bills each month, and not much more to show for his hard work than things.
“I had no financial security other than the hope of not losing my job. I was one bad day at work away from complete financial ruin, despite earning a healthy high six-figure income.
“Lifestyle inflation,” he said, “is the single greatest risk to one’s financial security.”
Lifestyle inflation. That’s why, financial experts say, it’s impossible to escape the cycle of living paycheck to paycheck unless you retake control of your finances. So, how do you get started?
Review Your Income and Expenses
Take time to get organized, jotting down your income and looking at what goes out every month. It isn’t that hard since most everything is automated these days.
“Most of us have direct deposit. Log into the account that receives your deposit and run a filter for all the deposits you’ve received from your employer over the last 12 months. Calculate your monthly average,” said Frank Murillo, a certified financial planner who is a partner and managing director with Snowden Lane Partners. “A lot of folks charge everything on their credit cards these days. … Thankfully, most credit cards have a year-end summary. Pull that summary for each of your cards and calculate a monthly average.”
Then, add in the things you don’t put on your credit cards, such as your mortgage or rent, utilities or car payment. This will give you an in-depth look at just what you’re spending on the necessities compared to the extras, such as dining out, clothes and entertainment.
This will help you to see the big picture of your finances, Murillo said.
“Once you understand what you’re actually taking home, you’ll start to see where you can trim the fat,” he said.
Make a Budget
Now that you know exactly what you must spend each month, figure out how you’ll spend the leftover. That’s necessary to break the cycle of lifestyle inflation, said Jennifer Stein, a certified financial planner and director of client engagement at Priebe Wealth.
“To escape this, look at the income you’re making, the bills you have, and what is left over,” Stein said. “Then determine how much you will save and make this your priority. Pay yourself first. After you’ve saved, you can use some of the extra disposable income for things you enjoy and can afford, whether it’s an extra vacation throughout the year or fancy date nights in the city.”
No matter how much you earn, a budget — and maintaining it — is crucial, said Matt Rowley, the founder and CEO of Freedom Retirement Services.
“I have come across many who do not keep track of the money they spend in a daily basis. It is easy to swipe a debit card to pay for a treat or a wanted item and not think twice about it, so plan that into your budget,” he said. “Everyone needs balance in their lives, but you need to be aware of how much that adds up. I have worked with people with modest incomes who have lived very comfortably in retirement.
“On the contrary, I have also worked with people who have large incomes, but only had a few hundred dollars to their name because they spent their earnings frivolously. No matter how much money you make, the ones who are the most successful are living a level or two below their income while tracking their expenses.”
Create a Savings Strategy
No matter what your income, your budget should include a savings strategy for an emergency fund, long-term savings and a retirement fund. And a strategy is especially necessary when you get a raise, experts said.
“When receiving a raise at work, I recommend using 30% of that to improve your lifestyle however you see fit,” Rowley said. “The rest should be invested or put away for taxes. Also, challenge yourself to look out for your future. For every dollar you spend on something fun, invest a dollar as well.”
Grishman said that even though he’s a financial advisor, it took the guidance of a peer to help him escape the cycle of living paycheck to paycheck. He knows just what to tell his clients.
“I am all for enjoying a nice vacation or paying for some upkeep on a home,” he said. “But these are items that can be funded with some planning and disciplined savings strategies rather than just being absorbed by annual pay increases. Perhaps a portion of your pay raise can go toward discretionary spending. But I have learned firsthand that real financial security often comes from having six to 12 months of income saved, and enough retirement savings accumulated to create 30 or more years of retirement income. It does not come from having lots of nice stuff.”
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