Building wealth: Avoiding lifestyle inflation

If your income increases it doesn’t mean that your lifestyle should to, instead save more money.

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investing_322Question:

I’m doing well in my career and my savings are growing. What is the most important thing I need to do to build wealth?

Answer:

I drive a 1997 Honda CRV. It’s in great condition, but a car built during Bill Clinton’s first term as president is hardly the prettiest in the parking lot. Car designs have advanced significantly since we bought it—used—but I haven’t succumbed to buying something newer. Why?

I’m avoiding lifestyle inflation. This is the idea that as your income increases so does your lifestyle, eliminating your ability to save more for your future. Our family income has increased over time, but we have been very focused on not letting our spending rise at the same rate.

If you were struggling to make ends meet, I’d have different advice on building wealth. But you are doing well in your career, and already “living within your means”’ which is one of the commandments of personal finance. Of course I endorse this message in general, but I would add the caveat that as your means increase, you need to increase the amount you save more than the amount you spend to avoid lifestyle inflation. If you get a raise at work, hooray: celebrate, then increase your automatic TFSA or RRSP withdrawal so that 75% of the raise goes to saving and just 25% to spending.

As a society, we now focus more on ‘I deserve’ than on ‘I can afford.’ As our income increases we feel we deserve more, and that means that we don’t move any further ahead on savings. The troubling reality is that most people are under-saving these days—just look at the staggering amount of unused RRSP contribution room out there. Yet the sale of consumer electronics has never been higher.

I do want to make one other point very clear: I try to avoid lifestyle inflation for a reason and it isn’t because I’m a miser. Wealth to me isn’t about having a big number in my bank account. It is about having choices. Driving a 1997 Honda CRV and avoiding lifestyle inflation in the present gives me many more choices for the future. I could have seat warmers and Bluetooth, but I don’t. And to me it’s worth it. Barely.

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