Have you ever noticed when you get a pay rise that even only a few months later you have no idea where that extra money is actually going? While at first you might have fantasized about all the great things you would be able to do with that increase in monthly income, the reality is this money often seems to magically disappear in just a short time and get absorbed into your regular budget.
This phenomenon is commonly known as lifestyle inflation and it means that every time you get more money, you also generally increase your minimum required lifestyle standard. Where at first you were happy with a second-hand car, that later needs to become a brand new car. And that brand new car needs to be handed in for a SUV just a few years later… Similarly your level of luxury on holidays, fancy clothes, expensive meals out etc. all increases, and likely any extra income is simply used for these purchases.
Whilst it is of course fun to spend a little extra on yourself, a consequence is also that you always need more and that you soon end up entering the competition to keep up with the Joneses.
Therefore from now on, make sure to always keep 50% of any extra money that you get: be a that a pay rise, some Christmas money or a bonus. Do this as soon as you receive it by depositing this money or setting up an automatic transfer and use it to pay down debt, save or invest in some way and get that money to improve your financial situation.
Then take the remaining 50% and spend that freely on whatever you want. In this way you get the best of two worlds: building a more secure future and enjoying the extra money.
Go through your bank statements today and see whether you got any extra money recently of which you can still “rescue” half to set aside. Then let us know of Facebook, Twitter or Instagram your progress and what you’d use any extra money for, with the #31DayChallengeToFE hashtag. You can also find out more about Lifestyle Inflation in step 31: Understand you will never have enough money of the 100 Steps to Financial Independence.