There’s not much you can do about inflation (unless you’re Rishi Sunak, apparently). But we can all do something about lifestyle inflation.
This describes something we’ve all seen people do, and probably done ourselves to a degree: every time your earnings increase, your spending increases to match.
No-one is immune: I know investment bankers earning close to seven figures who are also spending close to seven figures – so despite being in the top fraction of the 1%, they’re stuck on the trading-time-for-money treadmill with the rest of us.
Normal personal finance recommends that you save a fixed percentage of what you earn. Which doesn’t help – and, in fact, mathematically guarantees lifestyle inflation.
If you’re saving 10% of £50,000 and you earn a pay rise to £60,000, following this rule increases your savings by a mere £1,000 from £5,000 to £6,000 – while giving you £9,000 to inflate your lifestyle with!
There’s a simple solution to this: every time you earn more, increase your savings percentage.
In this case, say your earnings went from £50k to £60k, and you took the opportunity to increase your savings rate from 10% to 15%.
You’re now saving an extra £4,000 AND you still have £6,000 to improve your lifestyle. Which is fair enough: there’s no need to defer yourself all worldly pleasures today, and experiencing a reward will motivate you to keep finding ways to bring in more.
Following the same rule, you can also go easy on yourself if you’re not saving as much as you’d like today – as long as you plan to earn more in future.
Say you’re earning £30,000, and saving a mere £25 per month – that’s a 1% savings rate, which clearly isn’t good.
But then if your income increases to £35,000 and you start saving just half of the increase (still allowing for some lifestyle inflation), your savings rate immediately jumps to a far more respectable 8%.