Lifestyle Inflation and How to Manage It

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From the desk of Harsh Strongman
Subj: Why many high earners stay poor


Imagine this:

You make $8k per month. Let’s say there are no taxes and you don’t save any money (for simplicity) i.e. You spend $8k per month.

Your boss is very happy with your work and this year you get a nice 25% raise. You now make $10k per month. That’s great news!

You should be saving $2k per month now since your expenses are the same and your income has gone up, right?

WRONG.

Here’s how it actually goes for most people:

For a few months, you’re happy to get an extra $2k and you keep it in the bank.

Then you start getting used to having $10k in income and you start spending more.

You go to better restaurants, buy more things you don’t need, buy more expensive versions of things, etc. – after a while, you start spending your entire $10k paycheck.

You then become accustomed to that lifestyle and it becomes your baseline.

If you were to suddenly get demoted and have to get back to an $8k per month income – you will feel like your life sucks (even though earlier you were perfectly happy at $8k/month in income).

This is called lifestyle inflation.

If you aren’t mindful enough, your lifestyle will inflate and eat up your entire paycheck – no matter how big it is.

You will never earn “enough” to both spend and save because your spending habit will increase.

Be extremely careful of this because if you don’t – your net worth will be low forever.

How to prevent Lifestyle Inflation

This is advice I gave to all my salaried clients back when I operated my legal/financial consulting firm (handled by family now):

Live like you’re earning what you used to earn 2 years ago.

If you currently make $10k but were making $8k in income 2 years ago, live like you still make $8k.

The extra $2k goes into some kind of investments – equities, mutual funds, whatever.

You act like you only make $8k and the remaining $2k doesn’t exist.

This means if you planned on saving 20% of your income, it must be saved from the $8k i.e. you save an extra $1.6k and spend $6.4k (you act like the $2k literally doesn’t exist).

This way you never fall for lifestyle inflation.

If you lose your job or have some kind of setback (like many did during COVID) – you don’t suddenly feel a big pinch as you are already used to living well below your means.

Of course, over the long run, the only way to get rich is by starting a business, but if you’re hell bent on working a job – this one thing (living like you earn what you did 2 years ago) will ensure you never have to live paycheck to paycheck.

Hope this helps.

Your man,

Harsh Strongman

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