Written by 10:55 am Food For Thought, Investing

Why earning more doesn’t make you wealthy

About 4 minutes to read

When the UK first went into lockdown, I didn’t really think about what it would mean for my money — or at least, not how it would make me reassess my financial decisions.

At the time, I was more concerned with what it would mean for my work and health. Did I need a booster for our wifi? Would I start talking to the walls without other people around the office? Was this tickly cough Covid-19 or early hayfever?

By the end of the second week, however, I was beginning to notice just how much money I was saving by not commuting, by not buying coffee and lunch out almost every day, by cooking in regularly rather than ordering another Deliveroo after a long day.

And then it was payday. I realised that I still had money in my account from the last month, which made me pause. I was nowhere near needing to dip into my overdraft. I didn’t have to do any last-minute mental maths on paying things off.

I decided to look into why the big difference in my spending. Lockdown meant things had changed, of course they had, but I was still doing dinner or drinks with my friends several nights a week. I was still ordering food out over the weekend. I still had the same bills and mortgage payments.

I examined my outgoings in more details — tapping into my mobile banking app and digging more deeply into my spending from the last few months.

Thanks to my bank’s in-app categorisation features, I could see exactly how much I’d spent on eating out and those post-work Friday drinks. I could spot the hundreds gone on travel, not least late-night Ubers. There were the repeat offenders of Watch House coffee and Pret sandwiches and station bookshops. I was surprised at how much money simply seemed to have just disappeared.

No wonder, I thought, that I was saving so much more in lockdown.

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Thing is, I believed I had pretty good money habits. I was contributing to my savings, wasn’t using my overdraft regularly, was paying off my credit card with only a little bit of juggling each month. However, I could now see just how much better I could be doing — both in terms of saving and spending more mindfully.

Turns out, I’d been caught out by the sneaky beast that is lifestyle creep (another word for lifestyle inflation).

Investopedia defines lifestyle creep as:

“The phenomenon where discretionary consumption increases on non-essential items as the standard of living improves […] A situation where people’s lifestyle or standard of living improves as their discretionary income rises either through an increase in income or decrease in costs. As lifestyle creep occurs, and more money is spent on lifestyle, former luxuries are now considered necessities.”

Now, lifestyle inflation as defined above, isn’t inherently a bad thing.

As you earn more, it’s normal and expected for you to spend more on yourself and your lifestyle. No one expects us to stay living the same life as our career progresses.

Likewise, buying coffee on your commute each morning isn’t necessarily a frivolity — if it starts your day right and it’s something that makes you feel good, then buy the latte. The same can go for that new dress or that great jacket or a new set of headphones. In fact, Lucia Peters noted that some degree of lifestyle inflation is actually a good thing.

“Basic happiness matters,” she wrote for Bustle in 2017. “And items that help you achieve that kind of happiness in real, tangible ways — well, it’s hard to classify that kind of lifestyle inflation as negative.”

Lifestyle inflation can become a problem when it takes the form of living beyond your means. Some signs of it might be going paycheck to paycheck, not having good savings despite earning good money, or (as in my case where I was saving and didn’t feel like I was struggling) you’re saving way less than you want to be or could be.

Left unchecked, lifestyle inflation can become a problem — it can mean finding yourself stuck in a financial rut. But you can take control of it, bolster your lifestyle and build your wealth.

Start with your budget

Figuring out if you’re living the inflated life is the first step — so do the maths.

Look at what you bring in as income and compare it to your outgoings. If you’re looking at the two figures and they don’t match-up, but you don’t know why — that’s probably a sign of lifestyle inflation. Make sure you know what your overheads are and build yourself a budget that can really help you meet your money goals.

Saving and investing

Saving isn’t hard when you’re deliberate about it — but it can be easy to save less than we maybe could, putting those decisions off until tomorrow.

One suggestion from Kat Tretina for struggling savers is to think of it as paying yourself first: when your salary comes in, immediately pay yourself a certain percentage into your emergency fund, pension, and saving goals. Start saving an amount that doesn’t scare you and increase that amount as your salary goes up. The same goes when you receive a bonus. When you’re ready, you can also look into investment options and platforms that can help your money make money too (with a degree of risk).

Know your reasons

Our reasons for lifestyle inflation are often very personal — maybe you have a habit of buying drinks you can’t really afford for your friends, or shopping for groceries somewhere more prestige, or splurging on upgrades whilst on holiday. On the surface, you may link your decisions to a desire for experience or convenience, but they may also connect to your personal values, sense of self-worth and emotional landscape.

Don’t be afraid to ask: are my financial habits making me happy? And if not, take a step back and look at how you can be more mindful with your money.

Do what’s right for you

Ultimately — like with most things money — there’s no correct answer about how you should spend or save.

As Jim Wang wrote in WalletHack, if you’re concerned about lifestyle inflation and want to control it, focus on erasing the “lifestyle creep that doesn’t play a meaningful role in your life.” This isn’t about restrictions or doing a Marie Kondo on your money (unless you want to). It’s about choices and trade-offs: A new car or a luxe stag weekend? Living with roommates to save or having your own space now? We’re all making these decisions all the time, so it’s about making sure we’re conscious of those choices and being smart in deciding what’s right for ourselves in the short and long term.

It’s your money. And it’s your goals, your ambitions, your wants and needs and values that will help you avoid the creep whilst still building the lifestyle you want.

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We built ikigai specifically for those who want to bring their lifestyle to the next level, by taking better care of their finances.

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Visit https://ikigai.money to find out more.

Maurizio & Edgar, Co-Founders, ikigai

When investing, your capital is at risk.

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Last modified: 23 November 2020