Let's Talk About Money: Avoid Lifestyle Inflation this Spring
I hang out with a lot of smart, driven, independent women. Since we all work for a living, we talk about work, interviewing, negotiating raises, going for promotions, graduate school and our long-term career goals. However, there is one topic that even some of the most brilliant, capable women I know at best tend to avoid, and at worst will completely shut down rather than discuss.
That topic is money.
One of the reasons I’ve shifted towards writing more about money over the years I’ve had this blog is because I don’t want the default response to someone bringing up money to be that we all stick our heads in the sand.
Because money is one of those topics where the phrase “ignorance is bliss” simply does not apply.
In fact, over years of talking about money with people, what I’ve noticed is that the real concern preventing us from wanting to discuss money openly is that a lot of us think we are doing it wrong.
And even worse, we think we are the only ones doing it wrong.
It’s less “ignorance is bliss” and more... our own perceived ignorance is stressing us out.
As uncomfortable as it may be for everyone, there’s only one way to get rid of that nagging feeling that you’re probably doing something wrong in your personal financial life. Even if you have historically avoided money conversations because the last thing you want to do is prove that nagging feeling right, that worry about money isn’t going anywhere unless you address it head on.
Which means (you guessed it): we're all going to have to start talking about money.
Let’s Start VERY Small
Financial health and personal health have a lot in common: trying to improve either is very difficult if you focus on too many things at once.
As most people that have been on a “New Year New Me” crash diet with simultaneous aggressive exercise plan can attest... starting by attacking literally everything you want to improve about your health at the same time is generally not a good option if you want sustainable results. It works much better to focus on improving one aspect of your personal health at a time. If you lead a sedentary lifestyle, maybe you start by focusing on getting at least 15 minutes of walking in every day. Even if you don’t focus on your eating habits or exercise habits at all, something interesting happens: that little 15-minute walking habit you made starts creating momentum. After all, if you are already walking for 15 minutes, it’s easy to add a few more minutes to your time each day... and before you know it, you're walking 45 minutes daily (if you want to read more about this phenomenon, check out Charles Duhigg’s book The Power of Habit).
While most people are aware that starting small can work for our personal health, I don’t get the impression that people think the same rule applies to our financial health. Can taking a small step in the right direction actually help create momentum in our personal financial situation?
What does a small financial step actually look like?
I’m glad you asked.
One Small Step for Spring: Avoid Lifestyle Inflation
In many industries, the first quarter of the new year (January through March) is the season for annual raises and bonuses. If you are in the U.S. and are expecting a tax refund, that little windfall follows in April. While these potential income sources are certainly nice, they can have an unintended negative consequence on your overall financial situation:
Lifestyle inflation is what you are thinking about when you wonder how exactly you spent all that money the first year you earned a real salary, because the year before that you were working multiple part time jobs and barely covering bills (but somehow you made it work.)
Where did all that money go? You didn’t make a conscious decision to spend extra each month, you just... did. Accidentally.
Lifestyle inflation sneaks up on most people, but you’re already one step ahead when it comes to preventing it. Because you know that it exists and that it’s coming for you this quarter.
So you can defend your money.
Whatever raises, bonuses or refunds are headed your way this season, just remember that if you were making it work on whatever you were making before you got that extra income... then you can continue to make it work after you receive it.
In practice, this means that starting in February, March or April (or whatever month extra income starts heading your way) you continue to use the exact same amount of money per month that you were using before.
Example: Due to the raise you received, your previous monthly income of $3,000 a month is now $3,100 a month. If you don't let that extra $100 a month disappear into your budget, you’ll have an extra $1,200 a year (12 x $100) going toward your money goals.
Another Example: If you were making it all work on $3,000 a month before, but you made $3,700 in April due to your tax refund, guess what? You don’t have to let that $700 disappear. You can put that extra income toward your money goals too.
What should you do with your extra spring income?
We’ve discussed what NOT to do with any extra income, bonus or refund you may receive (don't let your monthly expenses creep up to devour it all), but what SHOULD you do with it instead?
Here are a few ideas:
Pay down debt.
Although paying off a big chunk of your student loans or credit card debt with your bonus or allocating any extra monthly amount you may earn throughout the rest of 2019 to go straight toward your debt may not be glamorous, doing so is a very healthy financial step in the right direction.
Start an emergency fund.
If you don’t already have an emergency fund, opening a savings account for emergencies is a smart financial step. There are plenty of resources online about how much money you need to have in your emergency fund (3 months of living expenses, 6 months of living expenses, etc.) but don’t let these overwhelm you. The first step is to start one and fund it with whatever amount you can. Then, you can figure out how much you want to have saved in your fund total and start working toward that goal.
Allocate extra to retirement.
Another arguably less than glamorous but healthy financial decision is to allocate whatever amount you may be earning extra per month the rest of this year to go straight into your retirement accounts (401K, IRA, etc.) One thing to note if you are already contributing a significant amount of your income to retirement: keep an eye on the maximum annual contribution limits to whatever retirement account you are using.
Plan for large expenses.
Another option for your extra income is to set it aside for a large upcoming planned expense that may be difficult to cover with your regular monthly income. Generally, it helps to separate this money from your regular checking account to make sure it doesn’t get spent accidentally. Large expenses you may be planning include a semi-annual or annual car insurance payment, an international plane ticket, a planned medical procedure, a planned home repair or renovation, or a whole host of other things. If you’ve previously avoided these types of expenses or used debt to fund these expenses, setting aside money ahead of time can make you feel more in control of your finances going forward.
Ultimately, being intentional with your money is at the core of avoiding lifestyle inflation. While what you should do with your own money specifically depends on your personal financial situation, putting some thought into where you want your money to go (as opposed to letting it disappear into your budget) is a success in and of itself. After all, it’s your money: it should always be working for you on the things that are important to you.