Key Takeaways
- Lifestyle inflation is something that can creep up on you, but if you stay aware, you can combat it.
- Divide your salary into objective and subjective parts.
- If you get the objective side right, you can enjoy spending the subjective side.
You’ve likely heard the anecdote about frogs in hot water. If you put a frog in boiling water, it’ll jump right out. However, if you put a frog in cooler water and gradually heat the water, the poor thing will be met with a different fate, as it doesn’t register the temperature until it’s too late.
Similarly, lifestyle inflation can creep up on you, and you won’t realize what you’re spending until you’re in deep! It may start with just a few extra dollars here and there, but before you know it, your expenses have exploded.
A good way to combat this is to divide your salary into two parts: objective and subjective spending. The first piece of that pie is going to be the objective part, or the part of your salary that goes towards non-negotiable spending.
Let’s say your salary is $50,000 per year; take 15% and save that $7,500 upfront. That’s the first part. Next, you’ll need to pay 20% in taxes, so that’s $10,000. Finally, there’s housing. Don’t go over 25% for housing, whether that’s rent or a mortgage. If it’s a mortgage, keep in mind that you’ll need to cover PITI: principal, interest, taxes, and insurance. For our example, that 25% is $12,500.
Now, that objective side just took 60% of your pay off the table. What’s left is the more subjective side of spending, which can be broken into two parts: needs and wants. The needs are things like food and basics you need to live. The wants are where people tend to run into trouble because they start to spend more than what’s left there. But as long as you stay within that amount, you can do what you want with it, within reason.
If you get the objective part right, by saving 15% up front, having 20% go towards taxes, and 25% for housing, you’ll be on the right track for the subjective part. You’ll stay out of hot water and your future self will thank you for it! Until next time, enjoy.
