The simple formula that will help you beat lifestyle inflation
Zach Holz says just because you can afford something does not mean you need it
“I can afford it" is a thought that will stop you getting rich. It’s especially bad if it crosses your mind after you receive a raise or a new, better paid job.
Like all the most-effective lies, it is built on a destructive truth. You probably can afford whatever it is you want because you are making such a great salary here in the UAE. It’s probably also something you have always wanted. Now, it’s within your reach.
I had a teacher friend who used to pull up to work every day in a new luxury convertible. It was a very pretty car. One day I asked her about it. I thought she might be independently wealthy or have a husband making way more money than we do as teachers. But, no.
She told me something I’ve heard many times since moving to Dubai: “I figure, I’ll only be able to afford it now, while I live in Dubai, and why not live a little?” She bought it on credit, and followed that up with: “It’s probably why I’m not saving much money."
In the financial independence world, we refer to that as “lifestyle inflation”. Basically, as you make more money, you spend more of it on nicer and nicer things - because you can afford it. There’s always something else to buy, no matter how much money you make and what you’ve bought before. Thank you capitalism.
Lifestyle Inflation can easily destroy your ability to save money or make progress towards your financial goals. Are you hoping to retire early? Living large now will keep you from that. Do you want to own property? How will you save for the down payment if your big pay cheque is swallowed by ever increasing spending? You won’t.
Fortunately, there’s a simple solution. When you first get a job, determine how much you want to save or pay down your debts. Then, add your normal bills, such as phone, utilities and rent to that. These are your standard monthly expenses, so subtract them from your salary.
If, for example, you earn Dh15,000 a month, want to save Dh5,000 of that and have normal expenses of Dh3,000, that means you have Dh7,000 left to spend. The key is to take that Dh7,000 and figure out how much you can spend each day on expenses such as food and shopping. I like to give myself more on the weekends than on the weekdays because I spend more when I’m not at work. So, if you spend Dh200 on each weekday, and Dh300 on the weekends, that will be come to about Dh7,000 a month.
This daily spending amount is key, because if you aim to spend less than that figure every day, you will rein in your spending and start saving more. I think of it as a little daily competition, and I get a little burst of happiness if I’m under my amount, for near constant reinforcement of a positive habit.
How this helps you control lifestyle Inflation is that when you get a raise or start a new job with more income, you just keep your daily spending number the same. This is the simplest solution to a complex problem that I can come up with.
If you're content spending a certain amount, realise that spending more will not change your contentment, because you were already content. You’re already happy spending that amount each day, and hopefully you are not cutting your spending to the point that you are miserable about it. Any extra money you earn just goes towards reaching your financial goals faster.
Even if you can afford something you want now, spending the extra money is not something you need to do. You can make that money work for you, creating long-term financial stability, early retirement, or opportunities that can only be seized when you have a strong bankroll behind you.
Dubai school teacher Zach Holz documents his journey towards financial independence on his personal finance blog The Happiest Teacher
Updated: November 15, 2018 11:27 AM