If you've gone through the process of joining our client family at Ignite Financial, you know the term "lifestyle inflation" through-and-through. This term of the week post is geared towards those of you who experience it but can't quite place a finger on what it truly happening.
Ever gotten a raise and at the end of the year realize that you didn't save any more money? Matter of fact, it's likely that you saved LESS money than you did before you got the raise (or even worse went into debt). Sound familiar?
Lifestyle Inflation is characterized by the increase in your expenses as your income increases. It is one of the MAJOR silent killers to your financial goals. In a smaller-scale example, it is the long-term equivalent of getting a large tax refund and spending it...all of it. Your income goes up for the month of April, and yet if you were to look at your April expenses, they would increase too.
This type of inflation is where everything that was used to be a once-a-month occurrence, becomes a once-a-week outing. A Starbucks latte in the morning becomes common place and now that you have extra cash in your account from your raise, you "can afford it now".
The problem with lifestyle inflation is that it keeps you in the "rat race" of your career. It keeps you trading your time for money, instead of having your money create money on its own time. Did you catch that? Re-read it and let it sink in.
Instead of investing your bonus in a retirement or investment account, you buy a TV. Instead of rolling over your 401(k) to an IRA, you cash it out (with penalties and taxes) and proceed to buy a the car you've been eyeing for the past few years. Both of these scenarios hurt you long-term, but because you have access to the cash, you want to spend it. You NEED to spend it.
You may have watched a "Morning Espresso" episode where I say that financial advisors are the thing between you and stupid. When lifestyle inflation starts to rear its disgraceful head, your advisor should be there to show you the increasing expenses. Step two in his/her process should be to explain and show you how it is affecting yourself 40 years in the future. They should provide value by explaining how lifestyle inflation will affect your long-term financial goals.
When is the last time you looked at your expenses from this year and compared them to your expenses two years ago? What changed? How often does your financial advisor demonstrate your progress towards your financial goals?