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How to build wealth despite lifestyle inflation

By David Hancock
  • October 19 2020
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How to build wealth despite lifestyle inflation

By David Hancock
October 19 2020

As your income has increased over time, you may have expected to have more cash flow and savings. What you may have found, however, is that the higher your income is, the more you’re spending. This is known as lifestyle inflation.

How to build wealth despite lifestyle inflation

How to build wealth despite lifestyle inflation

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By David Hancock
  • October 19 2020
  • Share

As your income has increased over time, you may have expected to have more cash flow and savings. What you may have found, however, is that the higher your income is, the more you’re spending. This is known as lifestyle inflation.

How to build wealth despite lifestyle inflation

Once you can afford nicer things, like overseas holidays, Uber instead of public transport, or nice restaurants, you’re more likely to spend money on those things. Your lifestyle adjusts with your income, often leaving you in much the same financial position as you were when you were earning less. 

So, how can you build wealth if you’re experiencing lifestyle inflation?

Set a goal

Start by establishing a goal so you know what you’re working towards. Saving for saving’s sake is unlikely to be successful. Are you trying to save for a home deposit? Investment property? To start a business? Once you know where the money will go and how much you will need to save, you will then have greater enthusiasm to put money away. 

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Start early 

Don’t put off creating a wealth strategy. The sooner you start working towards building wealth, the easier it will be. It’s easier to save money before you have other financial obligations such as children, a mortgage or the costs of schooling, and having a solid base behind you once you face these financial obligations will take a lot of the pressure off. 

Starting earlier will also give you a longer period of time for your investments to grow. For example, if you had purchased a home in Sydney in 2010, the median house price was $624,000. Eight years on, the median house price has increased to $1,150,357. Those that invested in 2010 now have the benefit of extensive capital growth, whereas those who have held off will now need to pay substantially more to get into the market. 

Commit to one hard year 

A good approach is to commit to one hard year of saving and living frugally. This will allow you to save as much as possible, without feeling like you’ve compromised your lifestyle completely. You’d be surprised how quickly a year will pass and how much savings you will have to show for it. 

For example, assuming you will need to put down a 10 per cent deposit to purchase a $500,000 investment property, you will need to save roughly $70,000 to cover a deposit, solicitor fees and stamp duty. For many couples, saving $70,000 in a year is doable if they cut their spending for just 12 months. Without setting a goal of saving that deposit in a year, a lack of focus and the temptation to spend could derail any savings goals and unnecessarily lengthen the time it takes to save the deposit to several more years. 

Knowing that once you get through that one tough year you’ll have the freedom to spend on something you want, like a holiday, will be motivating. By that point, you’ll be in a position to spend again as you will have a solid financial base under your belt. Even if you don’t save much at all in the following years, having an investment, such as a property, working away in the background means you can still be progressing financially during this period.

If you’re stuck in a cycle of lifestyle inflation, the good news is that you can still build wealth without losing your lifestyle. By making some sacrifices early on and for a short time only, you can build wealth while still living the lifestyle you want to live long term. 

David Hancock is a director and senior financial planner at Montara Wealth.

How to build wealth despite lifestyle inflation
How to build wealth despite lifestyle inflation
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