As a high earner (or future high earner) you may have heard of the dangers of lifestyle inflation. Some doctors may never feel financially secure—regardless of how much money they make—because of this phenomenon, where high earners or future high earners overspend as their income increases.
Lifestyle inflation is when a person increases their spending as their income increases or in anticipation of a salary increase. Even medical students and residents might find themselves suffering from future lifestyle inflation, where they’re overspending in anticipation of an earnings spike after completing their residency.
Pursuing a career as a doctor is a long and arduous process that is costly, so it can be motivating to anticipate the reward at the end of the journey.
The average medical resident in the U.S. is earning an annual salary of $63,400 in 2020, according to a Medscape report, while the average annual salary for a physician in the U.S. in was nearly five times that. That’s a huge jump in pay, and it’s only natural to think about what you can do with the extra cash.
But lifestyle inflation can prevent doctors from saving for retirement, getting out of debt, and in practice, keep you living paycheck to paycheck with just enough funds to pay for necessary expenses.
Learn how to avoid lifestyle inflation with these five tips.
1) Be conscious of your spending
Creating a budget can feel daunting, but following a few easy steps can help you develop and stick to your budget:
- Start by collecting all of your financial paperwork, like bank statements, credit card statements, and utility bills.
- Figure out your monthly take home pay—this will be the number you’re working with.
- Use your last month’s bank statement to find all of your expenses, including mortgage/rent, student loans, car payments, groceries, utilities, personal care, and subscriptions.
- Split up your fixed and variable expenses. You know your rent or mortgage payment will be the same each month, but your grocery bill likely changes. Give each of these variable categories a spending value.
- Add up your monthly expenses. If your expenses are greater than your income, then you’re overspending and will need to adjust. If you’re in the green, that’s a great first step toward putting your extra income toward your larger financial goals.
While the numbers might be different, the principles of budgeting will stay the same throughout your career. The gap between what you earn and what you spend is where your financial goals come to life.
Maintaining a budget doesn’t mean completely eliminating fun. Sure, cutting out your $5 morning latte can save you a bit of money, but if you live for your morning pour-over, then it may be worth it. The main priority is to be conscious of your spending so you can evaluate which purchases are earning their keep, and which ones aren’t.
2) Keep your financial goals in mind
Having a budget will allow you to think about your long-term financial goals, whatever they may be. Your financial goals may depend on whether you’re single or married, have kids or plan to, and other overall lifestyle goals.
Before making an extravagant purchase with your first paycheck as an attending physician, make sure you consider if that big purchase is really your main financial goal. If you have six figures worth of student loan debt, you might want to prioritize repaying those loans to avoid paying more interest down the road. If you’re aiming to maximize savings for early retirement, make sure you’re contributing as much as you can to a retirement portfolio. Perhaps you want to save for travel, your children’s college funds, or a new home. Make sure that money goes into a designated account.
That’s not to say that you can’t eventually buy the fancy car and live a more luxurious lifestyle, but make sure that kind of large purchase won’t set you back from reaching your goals.
3) Remember that many of your colleagues may be overspending
The “keeping up with the Joneses” culture may make it tempting to one-up or match your colleagues. But you can’t get a complete financial picture of someone just by looking at the car they drive or the home they live in. Someone might seem like they have it all but have $30,000 in credit card debt. If that’s the case, maybe they’re not saving as much as they’d like to for retirement. That lifestyle inflation could be keeping them from reaching their financial goals.
Being a fiscally responsible high earner can give you the benefit of delayed gratification. Once you do what you need to do to pay off your student loan debt, for example, you’ll have that money to put toward whatever you want without the debt hanging over your head.
4) Figure out what kind of saver you are
Are you the type to spend what you have right away rather than planning for the future? Do you add a little bit to your savings here and there? Are you saving for retirement? Are you in complete control of your finances with every penny accounted for?
Knowing what kind of saver you are can help you determine what type of goals to set. As with any goal, you want your financial goals to be specific, measurable, attainable, relevant, and time-bound, otherwise it’s easy to get off track.
Some banks allow you to create multiple savings accounts, or subaccounts, each with a particular goal in mind. These are ideal for short- or medium-term goals like purchasing a car, saving for a down payment on a home, or taking a big vacation. These goal-oriented savings accounts help discourage you from spending by limiting and charging fees for withdrawals, or sometimes even restricting withdrawals until you’ve reached the set goal amount.
If you’re planning to save for more than five years, mutual funds and other investment portfolios can be good options. The longer your money has to sit, the more likely it can bounce back from any market downturns and get the rewards of bull markets.
5) Spend only when it’s worth it
Spending now and saving for later are both important but evaluating what you’re spending on is critical. You can live within your means, save for the future, and allow yourself to have some fun. The key is spending and saving with intention.
For spending to be “worth it,” it should make you happy. So, what makes you happy? Traveling abroad? Going to happy hour with friends? New gadgets and devices? Figure out what makes you happiest and plan your financial goals around that so you can get as much enjoyment from those things as possible while keeping your long-term financial goals in mind.
You may need to make sacrifices to achieve all of your goals. Maybe you decide to live with your parents through medical school and your residency but manage to travel once a year and save money for a down payment on a house. It’s all about finding the right balance for you.
Build your financial plan and stick to it
A financial plan combines your short and long-term goals with the actions you’ll take to achieve them. Once you have created your financial plan, hold yourself accountable and stick to it to avoid lifestyle inflation. Read more about budgeting and financial planning.
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