To effectively manage your expenses in 2024, financial experts advise distinguishing between necessary spending due to inflation and unnecessary expenditure resulting from lifestyle inflation.
Discover how to reset your financial strategy in 2024 with WSJ’s Personal Finance series. First on the agenda: tackling lifestyle inflation.
Many wonder why their finances dwindle by year’s end, with inflation often bearing the brunt of the blame. Yet, it’s critical to notice a more covert culprit: lifestyle inflation.
As the year concludes and earnings rise, so too does spending. Gradually, we accumulate extra costs, whether it’s luxury items in our shopping carts or a growing collection of streaming subscriptions. Occasional splurges—from upmarket bar drinks to gourmet takeaways—morph into the norm, justified by our perceived financial leeway.
The surprise comes when the monthly budget runs thin.
To curb expenditure in 2024, experts urge distinguishing between necessary costs due to inflation and unnecessary lifestyle inflation. It’s tempting to assign excessive spending solely to increased living costs or the urge to compensate for pandemic-era restrictions, but financial advisers warn against overlooking the broader picture.
“Economics play a part, yet often it’s about matching our peers,” states Joseph Reinke, a financial analyst and the mind behind FitBUX, a financial technology firm.
Disentangling essential cost-of-living adjustments from excessive outlays involves a two-pronged approach, according to Charlotte Geletka of Silver Penny Financial Planning: overhauling your budget and confronting financial truth.
Analyzing Inflation’s Current Impact on Consumer Spending
While inflation shows signs of subsiding with certain prices dropping for the first time in two years, consumer expenditure on everyday items, from frozen goods to bakery bread, has substantially increased. Car insurance illustrates this trend clearly, with rates soaring to nearly 20% over last year as of October 2023.
The Bureau of Labor Statistics reports that by November 2023, average earnings for nonfarm employees rose by 4% compared to the previous year, slightly outpacing the 3% rise in the consumer-price index. However, even those who received substantial pay hikes during the Great Resignation era are finding that their heightened incomes are not stretching as far as anticipated.
Samir Balile, a 37-year-old pharmacist in Washington, D.C., expresses frustration over managing his finances. Despite owning his home and advancing in his career, the sense of his salary being insufficient is persistent.
Scrutinizing his monthly credit card usage, Balile commentates, “It’s bewildering questioning the outcome of your spending – pondering over what’s left, a mere $200?” He observes a personal trend towards a more lavish post-pandemic life, which he fears would shock his mother.
Balile’s examination revealed a substantial increase in social expenditures. Casual after-work drinks have escalated into routine outings featuring multiple cocktails and shared appetizers, just as a prelude to dining out. This shift reflects a ‘go big or go home’ attitude that’s become prevalent in his social circle post-pandemic.
Is Upgrading Your Lifestyle a Smart Investment?
Elevating your expenditure can have its advantages. Investing in a premium lifestyle might serve as a statement of identity, aligning oneself with specific social circles, explains Dr. Ori Heffetz, a Cornell University associate professor and consumer behavior specialist. According to him, it’s an investment in image, yet one that doesn’t guarantee returns.
The mantra often goes, “Dress like the job you want, not the job you have.”
However, the challenge lies in the reality that visible signs of affluence—those we can buy—only represent a slice of the wealth narrative. The more significant, yet hidden indicators of financial success, such as savings and investments, are not on display for observers, leading to potential misjudgments.
“You can’t see my bank balance, but you can definitely see the car I drive,” Dr. Heffetz remarks, highlighting a major skew in perception.
However, this kind of investment entails risks. Should career advancement not go as planned or if your earnings plateau, the burden of reducing your inflated expenses will be even more daunting.
Reverse Your Spending: The Backward Budget Strategy
Counteract lifestyle inflation effectively with the backward budgeting method, advises Geletka from Silver Penny Financial. With the fiscal year ending, it’s an ideal period to evaluate your annual financial activities, leveraging a complete set of 12 months’ data.
Delve into your yearly banking records, weeding out extraneous expenditures such as superfluous subscription services or leisure travel, to isolate the core cost of living. The aggregate of indispensable expenses—typically encompassing housing, transport, grocery bills, insurance, and other tailored household outlays—becomes your benchmark.
Assess this figure against your past spending habits. Discern between costs driven by general inflation versus those caused by personal choices that increase your standard of living. For instance, a hike in utility bills stands apart from choosing a luxury loft over a simple flat.
Next, scrutinize the surplus spending in the discretionary spending zone. Did your streaming subscriptions’ prices surge, or did your package volume expand? Analyze your eating out expenses month over month.
Geletka emphasizes transparency in financial self-examination: “Simple in concept, it is nonetheless challenging in practice, and I believe there’s a common reluctance to face financial realities head-on.”
But awareness is crucial. By confronting your bank statements and spending receipts, you arm yourself with knowledge for strategic planning, making this introspection an essential step towards financial control.
Crafting Attainable 2024 Financial Objectives
To pave the way for financial improvements, start by zeroing in on specific spending behaviors that need attention—for example, frequent reliance on ride-sharing services versus public transportation. Experts recommend selecting one expenditure to focus on diminishing over an incoming month. Kick off by enhancing your expenditure consciousness, particularly in your chosen area. Keep a diligent record of your spending, including all costs associated with ride-sharing apps.
After tracking your expenses for a month, review your total spend on ride-hailing services. With this insight, the following month’s aim should be to reduce this figure. However, the importance of setting achievable goals cannot be understated. Completely removing the Uber app from your smartphone isn’t necessary.
“One attempt at overhauling your lifestyle in a sixty-day sprint can lead to quick burnout and a return to old habits,” warns the expert. Choose gradual adjustments for sustainable financial behavior change in 2024.
