Yahoo Finance How Millennials Should Handle Lifestyle Inflation
Lifestyle inflation is a natural part of growing up.
Promotions, raises and bonuses offer millennials (and members of all generations) the opportunity to start living more comfortably, or even extravagantly. While the lifestyle inflation creep often sends personal finance enthusiasts into a panic, millennials can embrace it to reach goals -- and still enjoy the present.
Lifestyle Inflation Happens
A significant number of personal finance experts advise the young to stave off lifestyle inflation by keeping a style of living similar to college and banking the extra money or saving for the future.
Sure, it's a fair point to make if a person's goal is to retire at 40 with $1 million dollars in the bank and then live off $40,000 a year and hope it doesn't run out.
But it's a rather ridiculous request to tell 20-somethings to never inflate their lifestyles. (After all, no one wants to be eating ramen and munching on three-day-old pizza forever.) Lifestyle inflation is also sometimes entirely out of a person's control. Gas prices fluctuate, public transit fares go up, taxes increase, landlords raise the rent, food becomes more expensive -- the list goes on and on.
Besides the unavoidable creep, early adulthood comes with expensive milestones and events, including marriage, attending weddings, buying a home, buying cars and having children. Plenty of these can be done frugally and within an individual's means, but they still contribute to lifestyle inflation.
Where to Put Extra Money
As millennials start making more money, it's acceptable to increase standards of living. But in order to really maximize higher incomes (or bonuses or tax refunds) they do need a plan.
Focus on Debt
A significant percentage of millennials carry debt in some form. In fact, nearly 40 percent of households younger than age 34 had student loan debt alone in 2010, according to the Pew Research Center.
An increase in income offers the opportunity to release the burden of debt sooner. Increases in salaries should be seen as a way to put more money toward paying down student loans or consumer debt. The faster debt is paid down, the less it costs in interest and the sooner that money can be put toward other financial goals.
Millennials who are serious about getting debt-free quickly should commit to putting 90 percent of all unexpected windfalls (including bonuses and tax refunds) toward debt. Five percent can go toward savings and five percent toward something enjoyable.
This ratio should be adjusted to increase savings if the millennial doesn't have an emergency savings fund. Even while paying down debt, it's important to have at least $1,000 saved. This can help avoid sinking deeper into debt when the unexpected happens, such as a car accident or home repair.
Furthermore, millennials who pick up side jobs would be wise to dedicate all money earned toward paying down debt.
Ways to Save for the Future
Millennials may be wary of the stock market after witnessing the fall out from the Great Recession, but it shouldn't prevent them from starting to save for retirement and more immediate goals. A raise at work, a bonus or a tax return all provide the perfect opportunity to tuck money away for short- or long-term goals.
-- A tax refund could help fund an IRA, pad an emergency fund or go toward the down payment for a home.
-- A raise at work not only means more money will go into your 401(k), but you can also afford to increase the amount you put toward investments or directly into a savings account.
-- Bonuses are a perfect way to drop a big chunk of change into a fund to save up for a new computer or put toward flights to four different weddings or invest in an index fund, mutual fund or exchange traded fund and decide what to use the earnings for later.
-- Incomes from a side job could be exclusively used to save money, after debt is paid off.
Don't let retirement be the only future-focused savings goal. Set up accounts earmarked for paying for travel, home buying or having children, and then commit to automating a percentage of each paycheck to go into the funds.
Create a Fun Fund
An increase in pay should lead to an increase in fun. There is nothing wrong with allowing some money to go toward frivolous, indulgent activities or purchases. Just remember: Everything needs to be in moderation.
The safest way to have fun without blowing through newly acquired money is to set up a fun fund in a budget. Just like saving for future goals, the fun fund pays for the here and now. Commit a percentage of a paycheck, perhaps 3 to 5 percent, to go toward the fun fund.
Even the most frugal among us need to cut loose sometimes. Whether you save up that money for a big splurge or just use it to go out to lunch, it's a personal choice.
Embrace Lifestyle Inflation
Sometimes the best choice is to lean into the changes in your financial life. Being too focused on the future can be detrimental, just like being too focused on enjoying the present can rob future you of life experiences and retirement. There can be a happy balance between lifestyle inflation and responsible financial decisions.
Erin Lowry writes about personal finance and manages social media for MagnifyMoney.com, a site dedicated to helping consumers save money by finding simple, transparent financial products. She is also the founder of the personal finance blog Broke Millennial.
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