The increase in income after a student graduates and starts working full time is a pivotal point in one’s personal finance journey. This moment will often set the precedent for saving and spending habits for decades to come.
And it can be tough to resist drastically increasing your spending. You feel like you should be rewarded for those long nights of studying and those years of sharing a bathroom with multiple people. It’s time for a few upgrades: a bigger apartment, a nicer car, fancier restaurants and some new clothes. Maybe throw in a 4K TV while you’re at it.
The tendency to spend more as income increases is known as lifestyle inflation, and it is a killer for saving money and planning for retirement. Unfortunately, it’s also a widely accepted and even celebrated part of American culture. Some people will take it so far as to start spending money before they start earning more money, banking on the higher income in the future to pay off their purchases today.
So how can you keep from having your financial foot caught in the bear trap of lifestyle inflation? Contributing to a 401(k) at work is a great way to save money, and since you won’t see it in your paycheck you won’t be able to spend it. If a raise comes your way, consider bumping up your 401(k) contributions, or putting some of your new earnings into an IRA.
Tracking your spending can also be an easy way to keep an eye on lifestyle inflation, or sticking to a budget (although I don’t use a budget).
I personally enjoy calculating my savings rate, i.e. “I saved 30% of my income this month.” When your earnings go up, you should be able to increase your savings rate, or at the very least keep the percentage constant. Alternatively, you could set a monetary goal, such as, “I want to save $3,000 by this time next year.”
No matter how you go about it, controlling your spending as your income increases is an important step to achieving your financial goals. So to all my friends who will graduate soon and start working full time, I challenge you to fight lifestyle inflation and start your retirement savings off strong. #MoneyGoals
Related reading: Why I Want to Live Like I’m in College My Whole Life
(Pictured: My ticket to the Mavs game last night. You bet that I didn’t pay for it though, my man CF hooked me up)