How to Avoid Lifestyle Inflation as Your Income Grows

Earning more money is fantastic—but without the right financial mindset, you may find yourself saving less, spending more, and facing a brand new set of money challenges. What to do? Read on for a few tips about how to avoid lifestyle inflation as your income grows. 

Write Down Your Budget 

After an increase in income, it’s tempting to think: “I have enough money to cover my needs, do I don’t need a budget.” However, earning more money is precisely the right time to make a budget and stick to it. Budgeting is critical to maximize your savings and ensure you’re spending money wisely. For more information on how to build a budget, check out the archives on blog.harvardfcu.org.  

Live Below Your Means 

Just because you can afford it doesn’t mean you need it! Living below your means is a surefire way to increase your savings, put more money into retirement and meet your financial goals. Don’t purchase a brand new phone or car or pair of shoes, just because you can. Instead, continue to live a budget-conscious lifestyle even as your income grows. Depending on your household, that might mean shopping at secondhand stores instead of buying new, cooking at home instead of eating out, and avoiding impulse buys.  

Pay Off Debt 

If you find yourself in possession of a growing income, prioritize paying off debt faster. High-interest debt (which often comes from credit card bills) should be paid off first. After that, consider paying off a mortgage or student loan sooner—but be sure to check in with your lender about the impact of any pre-payment penalties. While paying off debt isn’t as exciting as a celebratory shopping spree, erasing debt faster is one of the best steps you can take for your future financial wellness.  

Focus on Long-Term Goals 

Making a list of long-term goals can help to avoid short-term spending that’s not strictly necessary. Whether you’re saving up for an overseas vacation, a special occasion or a family member’s college fund, consider opening a separate account to stash away discretionary funds for a specific purpose. And, if your long-term goal is retirement: getting a raise is an excellent time to start your Individual Retirement Account (IRA) and maximize tax-advantaged savings every year.   

Start an Emergency Savings Account 

Extra cash burning a hole in your pocket? That’s an excellent sign that it’s time to start an emergency savings account. Experts recommend maintaining three to six months of living expenses. Importantly, this money should be kept in a savings account rather than an investment account, do funds aren’t tied up and can be accessed immediately, if needed. An emergency savings account will help to ensure that if your income level does suddenly decrease, you’ll have enough funds to cushion the blow.  

Invest Extra Cash 

If you’ve already paid off debt, built an emergency savings account and maxed out your Individual Retirement Account (IRA), then it might be time to look into other kinds of investments. Harvard FCU members can schedule a complimentary consultation with CFS financial advisors to learn more about the financial planning and wealth management services offered by the Credit Union; which may include stocks and bonds, mutual funds, life insurance and so on.