You got a raise - congratulations! That is the best feeling, isn't it? Having a little bit more money in each check so things aren't quite as tight financially each month can make such a big difference. Whew. You can breathe a little.
Getting a raise can really help you meet your financial goals. Where so many people get in trouble is with lifestyle inflation. What is lifestyle inflation? Well, it's when your income increases but your spending also increases. Lifestyle inflation is when you buy something you may not have been able to afford before your raise. Maybe it's a one-time purchase such as a new cell phone. Or maybe it's a purchase that will cost you more each month because it comes with a payment like a boat or a new car - ouch. That raise you got no longer helps you meet your financial goals because now your spending went up, too.
Lifestyle inflation can be a slippery slope. All of a sudden you have a bit more money each week so maybe you eat out more often or go shopping every weekend. It's a hard thing to fight, and it's more common than you may think. A reader recently shared with me that he got quite a big raise at work. I congratulated him, of course, but also gently reminded him to be sure he was sticking to his budget and putting those extra dollars to good use. Here is the advice I gave him to fight lifestyle inflation:
1. Stick to your budget - see where that extra money can do the most good. Have debt? Pay a little extra each month. Have little or no savings? Now you can create a new line item in your budget to start saving each month. Want to go on vacation? Now you can save up for it in advance by putting aside money each week. Make sure your increased income isn't being spent on things that are not aligned with your financial goals.
2. Reward yourself! You got a raise! Go ahead and set a small amount aside to buy something with or maybe go out for a nice meal. You work hard and deserve to have a little treat. Just make sure that reward is a one-time purchase and doesn't come with a new monthly payment each month.
3. Do the math - see how much your income will change each week, every month, and all year with your raise. Seeing the raise in black and white will help you understand just how much more is coming in so you can be strategic about how you spend it.
Lifestyle inflation can be avoided if you're careful and aware of your spending. Make sure you're sticking to your budget and putting that raise where it can help you and your family the most. The same thing holds true for any sort of windfall such as a big tax return or an inheritance. Don't worry about buying the newest gadget or getting a fancier car just because you have more money coming in. Be cautious and stick to your budget so lifestyle inflation doesn't get you off track.
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