by Pieter Coetzee, Regional Head at the Wealth Corporation, Port Elizabeth
Mr Gray didn’t consider himself indulgent or frugal. He lived a comfortable lifestyle, splurged less than his friends, and saved what he could. One day, Mr Gray changed jobs and with the salary bump came longer hours and more stress. To compensate, he bought more takeaway coffee to wake him up after working late. He went on more expensive holidays more often to relax. He bought himself his dream car because “he’d earned it”. Sounds reasonable, right?
While his new lifestyle didn’t land him in the red, it didn’t get him much further into the black either. His savings remained a by-product of his spending habits. Mr Gray’s behaviour is popularly known as lifestyle inflation: the more you make, the more you spend.
A recent Brookings Institute study found that middle-class families in the US are twice as likely to live pay day to pay day as low-income households. The study referred to this as the “wealthy hand to mouth” set. These people are typically well-educated high-earners and yet they have not established the savings safety net one would expect.
Psychologists refer to our longing for bigger houses and cars over retirement funds and savings accounts as a “hedonic treadmill”, driven by a desire for greater luxury and indulgence. The desire to improve our economic and social position is typically referred to as “keeping up with the Joneses”. Research shows that it is not having more money that makes people more satisfied, but having more money than our peers.
A feeling of entitlement to satisfy our immediate desires, given our labour, also spurs us to spend rather than save. Rewards aren’t a problem in themselves, but rewarding yourself to the extent that it significantly raises your lifestyle costs is. Eating out a little more often and buying a new car with high instalments are two ways of rewarding yourself that will have vastly different effects on your bank balance in the long term.
For an idea of the cumulative effects of the “little” luxuries we enjoy, consider the table below. If you invested the R784 that you spend in a month on a R28 double-strong, triple-tall cappuccino kick every day, you would earn, in today’s buying power:
| Term
(Years) |
Amount
Invested |
Present Value
Proceeds |
Enhanced
Return |
| 10 | R94 080 | R122 249 | 30% |
| 20 | R188 160 | R323 593 | 72% |
| 30 | R282 240 | R655 209 | 132% |
| 40 | R376 320 | R1 201 385 | 219% |
| 50 | R470 400 | R2 100 940 | 346% |
Please note that these figures are based on a real return of 5%.
Countering lifestyle inflation is possible. Firstly, you should always keep your financial goals in mind. High income earners often don’t feel the need to increase their savings and retirement contributions with an increase in salary as they already have some money saved and treat the additional income as discretionary. However, as your replacement income in retirement is linked to your salary, it is important that your retirement contributions keep pace. For this reason, your retirement contributions should increase by the same percentage as your raise. The same goes for your emergency savings account, which should contain the value of between three and six months’ salary.
Secondly, remember that your short and long term goals are unique. They should be based on your income, your budget and your time frame. Your financial roadmap may not look like as fun as Mr Jones’, but remember that it will take you where you want to go — and Mr Jones may not be following a map at all!
Thirdly, try out your desired lifestyle upgrades before you commit. Determine the additional monthly expense of the changes you want to make and try saving that amount for a few months. If you find you can comfortably get by, then you can make the changes with confidence. If you find you can’t, then you have succeeded in averting making a costly mistake – and boosted your savings to boot.
Finally, make sure you leave room for some “me” money. Try setting aside 10% of your salary boost for flexible rewards spend such as meals out, local holidays and new clothes. Be mindful that having the freedom to choose how you reward yourself can feel particularly satisfying while fixed monthly expenses (particularly on luxury items) can feel like a burden over time.
Lifestyle inflation can be a very difficult thing to keep in check. Enjoy your raise, but ensure you raise your savings and retirement contributions in turn. As with any change in your personal circumstances, you should review your financial plan to ensure that you are still on track to meet your goals and objectives. That way, tomorrow won’t be something you dread, but something you welcome. Visit www.thewealthcorporation.co.za and try out our retirement calculator for a better idea of how prepared you are for tomorrow.
About The Wealth Corporation
The Wealth Corporation was founded in 2001. Since then, they have experienced considerable growth and gone through many changes, including the establishment of a national footprint and their partnership with Citadel in 2012. They have a proud history as being thought leaders in the industry, developing best practice in client service and advice processes and leading by example. Their advisory solution offers a complete view of the retirement planning and management process, looking at all aspects of financial and personal well-being. This process is called Integrated Insight.
