Lifestyle Inflation is Eating Up Your Money

What did you do the last time you landed a pay rise?

Go out for dinner, buy a new pair of jeans or shout your mates a round, maybe.

It’s quite natural to feel flush with cash after your boss gives you a tip, and most people give themselves a dinner-shaped pat on the back when it happens. The trouble is, that pat usually turns into a gentle rub that never stops.

Your newfound wealth works its way into weekly spending and suddenly you’re no better off for the pay rise.

This is referred to as lifestyle inflation – the cost of your lifestyle increasing alongside your pay cheque – and is one of the most common and significant financial mistakes people make.

Because what you do with your pay rise could be the biggest financial decision you make, often without even realising it.

A person can go from earning $50k to $100k in five years and wind up with the same amount in their savings account, but maybe a few nicer things to sit on as they sip their gradually nicer wine. When in reality, there’s a good chance they were happily living on that $50k and could probably have done so for another couple of years.

How The Numbers Stack Up

Consider that $50k is around $790 a week after tax, and $90k is $1,260 a week after tax and HECS repayments. So if you were to secure a $10k pay rise each year, but continued living on that $50k salary, you would accrue $47,580 in savings, for not changing anything.

Even if you saved half your pay rises, you’d be $23,790 in the green. That’s a lot of rounds for your mates. And these savings are before interest.

What It Takes To Tame It

The key to beating lifestyle inflation is a concerted effort to do nothing. Keep your lifestyle expenses at bay when you get a pay rise and send that extra money into an account that you can’t see and won’t be tempted to access.

The best way to do this is to arrange a direct debit each pay day. This way you newfound wealth disappears before you have a chance to get your good-time mitts on it.

If that’s too tempting, talk to your payroll manager about sending your salary to two accounts, straight from work. This way you won’t even see it hit your card.

Lifestyle inflation is eating up the pay rises of most Australian workers, but with a bit of application you can get way ahead, without lifting a finger.