We’ve all been tempted to overspend before. Often times it’s harmless. We spend a bit too much on date night, or we buy something we don’t actually need from a tourist shop on vacation. Small breaches of our budget are forgivable – and common! They happen to everyone. But when you consistently spend more than you can afford, you may be falling into a lifestyle inflation trap.
What is Lifestyle Inflation?
Lifestyle inflation is fairly simple – you start spending more than you make. Or, a better way of looking at it, is you spend more than is responsible. It typically happens when your income increases suddenly. For example, when an attending physician gets their first job after residency their salary may increase from $50,000 to $250,000 annually. That’s a big jump, and it’s tough not to spend the sudden influx of cash you have coming in.
Who Deals with Lifestyle inflation?
Lifestyle inflation is especially common among career professionals who make a significant income. Medical professionals, in particular, face a unique set of problems when they land their first attending job. Everyone around them is living the high life – often purchasing new homes and cars, or taking lavish vacations. It’s tempting to spend accordingly for the sake of fitting in.
Alternatively, new doctors may feel a sense of entitlement as they begin their career. It’s completely understandable – as a doctor, you’ve spend a lot of years working hard to earn your degree. You may feel as though a new car, new house, lavish dinners out with friends from work, and more are all something you’ve worked for. Unfortunately, the spending spiral pattern that indicates lifestyle inflation has larger implications.
What’s the Downside?
When you outspend what you make, it’s impossible to sustain that habit without it taking a negative toll on your finances. You may find that you’re unable to pay down your student and consumer debt, save for big life goals or retirement, or establishing an emergency fund.
Over time, you put yourself at a disadvantage and will be unable to bounce back from any financial setbacks. If you continue to outspend what you make, you’ll need to take out more lines of credit. Eventually, when you max that out, you are pushed into a corner where your financial options are limited.
Ideally, more money should mean more options. But if you are spending money before you have it, you put a cap on what you’re feasibly able to accomplish. For example, if you have cash flow available, you’re able to pay for the hefty bills that come with an unexpected medical emergency. You’d be able to help a family member who needed it while still covering your monthly bills without issue. That kind of flexibility is something you deserve, but overspending in the short-term won’t make it a long-term possibility.
How Do You Avoid Lifestyle Inflation?
The first thing to do is approach your financial life with honesty. Take a hard look at your spending and determine whether or not it’s inflated in comparison to your current income. If it is – it may be time to set a budget, and stick to it. Determine what expenditures you can cut, and which are either necessary or genuinely adding value to your life.
It can be helpful to ask yourself why you’re spending in a certain way. Is it because you genuinely want more “stuff” or to experience certain things? How can you achieve the same emotional outcome while spending less? A common example is overspending on dinners or drinks with friends. You spend the money because you want to be with your friends and enjoy time together. But you could achieve the same outcome by having people over for drinks or attending a free outdoor concert in spring or summer.
Finally, it can help to take a look at the “absolutely necessary” expenses first and foremost. Account for taxes you’ll owe and living expenses, and build your budget putting those two things first on your priorities list. You never want to be in a situation where you make $250,000 a year, but are late with rent or unable to pay your taxes owed when you file.
Change the Script
If you feel like you’re stuck in a rut, and you can’t break out of the habit of overspending, you might need some help changing the script. Speaking with a financial planner who has experience working with medical professionals can help. At Wealth Habits, we work with doctors – particularly in the tri-state area – who face lifestyle inflation every day. We’d love to help you create a lifestyle that’s in line with your financial goals, while still allowing room to enjoy your day-to-day. Contact us today to set up a consultation.