Lifestyle inflation is keeping you broke

How the Middle-class Can Escape the Wealth Treadmill.

Photo: Unsplash Source: Medium | Makings of a Millionaire

Building wealth isn’t about how much money you make, it’s about how much money you save. Your savings rate, how much of your take-home pay you save, is the most important number when it comes to your personal finances.

That’s why I am such a fan of the Financial Independence, Retire Early (FIRE) movement. The only variable you need to keep track of is your savings. If you know your savings rate, you know how many years until you can retire.

Having everything depend on your savings rate feels very fair to me.

If you have a low income but are willing to make sacrifices, you can achieve a high savings rate. If you have a high income but fall victim to lifestyle inflation you will have a low or even negative savings rate.

A simple way to increase your savings rate and avoid lifestyle inflation

Your boss calls you into his office to let you know that you have received a 5% pay raise. Congratulations take a minute to enjoy the moment and the recognition of all your hard work over the past year.

Now for a critically important question, what are you going to do with that extra 5%?

My advice; pretend like it doesn’t exist.

Set up an automatic withdrawal to move that extra 5% from your checking account into an investment account every payday.

Then you simply live your life as you did before the raise. You were able to survive before you got that 5% pay raise and you’ll be able to survive if you dedicate all that new money into savings.

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