A household earning $500,000 — half a million — sounds like a lot of money to live on annually. But still many American families taking home this amount just can’t seem to save.
Financial adviser Lori Atwood, who counts nearly 400 people in the affluent Northwest Washington, D.C., region as clients, told The Washington Post, some families earning $500,000 a year still end up with little to no savings. “It is true but ridiculous,” she says.
The reason? Lifestyle inflation.
“Lifestyle inflation refers to increasing one’s spending when income goes up. Lifestyle inflation tends to continue each time someone gets a raise, making it perpetually difficult to get out of debt, save for retirement or meet other big-picture financial goals. Lifestyle inflation is what causes people to get stuck in the rat race of working just to pay the bills,” Investopedia reported. In short, it happens when once luxuries become “necessities,” and your spending increases drastically.
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“One New York City-based family of four profiled on the blog Financial Samurai brings home $500,000 a year and still ends up with very little besides 401(k) money. Even though they easily qualify as ‘upper class’ after taxes, fixed costs, childcare and discretionary expenses, there’s only $7,300 left each year to go towards other savings goals, investment accounts or retirement funds,” CNBC reported.
Lifestyle inflation is a trend in most major cities, such as New York and San Francisco.
“A hefty paycheck doesn’t always guarantee wealth or financial peace of mind. By contrast, budgeting and living beneath your means, no matter your income level, can help you out tremendously in the long run,” CBNC reported.
Resetting your financial goals is a must if you are experiencing lifestyle inflation. It might be time to strip down some of your expenses — cut out things you have recently added to your life. Otherwise you could be facing financial disaster in a few years.
“The other major problem is that lifestyle inflation takes away from handling long term personal finance goals like financial independence. If you take a raise and start spending all of it now, that means you’re not preserving any of it to spend later on. You’re not bringing retirement any closer. You’re not moving toward debt freedom. You’re simply not moving toward any financial goals,” The Simple Dollar reported.