When you’re used to following a certain budget, getting extra money can seem like an easy bonus – it doesn’t form part of your budget so it’s okay to spend it away. After all, if you’ve taken care of you bills and your savings, everything else is gravy right? But that’s where it is easy to fall into the trap of lifestyle inflation. Suddenly that extra bit of money is swallowed up by a new car payment, extra cable channels, or lunches out. You get used to having that extra money. That’s when it’s no longer a bonus or a splurge – you’ve quietly upgraded your lifestyle and now going back is much harder than going forward.
Original photo by Images of Money (http://www.flickr.com/photos/59937401@N07/)
Instead, when you get a raise or a promotion, take that money and save it (or pay debt with it). No, you don’t have to save it all – but you should save most of it. Here are some ideas about what you can do with that new-found money.
1. Pay off debts: Do you have any credit card debt that’s been hanging around? Student loans that just don’t seem to go away? When you get a raise, try putting that extra bit of money towards a higher debt payment. It’s easy to make extra payments – with most companies, even student loans, you simply make your extra payment the same way you make your regular payment, and it will be directly applied to the principal. You’ll save on some interest and, if you keep it up, you’ll pay off your loan faster.
2. Save money: With a raise, you could easily start a monthly contribution towards a retirement plan or emergency fund. Most banks are happy to help you set up a monthly automatic deduction – you don’t even have to remember to do it! If you are already saving towards retirement, you can use your raise to increase your regular contribution. All it takes is a quick visit to the bank and a few signatures – I did this just the other day, and it was completely painless.
3. Buffer against life: Gifts, repairs, replacements, insurance… there are numerous irregular expenses that pop up throughout the year which can easily derail even the best budget. Why not take your raise and use it to fund an account for irregular expenses or a spontaneity fund? Use this money to pay for birthdays, taxes and gym memberships and never have those costs surprise your budget again.
4. Treat yourself: If you’ve done everything listed above and you still feel like there’s money left over, now is the time to treat yourself. Perhaps you could give yourself a bit of extra money each week in a “Coffee Fund”. Or perhaps $10 or $20 per paycheque will go into a “date night jar”. At this point, it’s entirely up to you! Don’t be afraid to enjoy the rewards of your hard work – just don’t neglect your finances in the process of doing so.
Brian and I are both starting new positions this May. As a result, we’ve updated our budget. We are trying to consciously avoid lifestyle inflation by following many of the tips outlined above. I think we’ve achieved a good balance between saving and spending, which you can read about in the next blog!
What do you do to avoid lifestyle inflation?
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