posted in: Building Wealth

How to build wealth whilst avoiding lifestyle inflation


Written by Annabel Ellis, Montara Wealth Marketing Manager (previous sufferer of lifestyle inflation)

We all remember our first job. Mine was a Sunday shift in a dumpling store whilst still at high school. I quickly realised that now that I earnt my own money, I could buy sushi once a week for lunch, go to dinner on a Saturday with friends and get a gym membership. These were all little luxuries that I hadn’t had the opportunity to enjoy on my own accord before. My income had improved, and so had my lifestyle.

Fast forward 7 years and my income has increased as my experience and skill have increased. I work 5 days a week, receive an annual salary and can spend my money on whatever I desire. Daily coffee’s, weekend dinners, holidays, and a gym membership have become a part of my budget, as my income has increased.

With a higher income, I should find myself with the opportunity to get ahead and on top of my finances, able to shape my future and build wealth. But how can I get ahead if my expenditure continues to increase with my income?

What is lifestyle inflation?

Naturally, when you have a substantial pay rise, your spending rises accordingly. You realise you can upgrade to a nicer rental property, go on holiday overseas rather than interstate or get an uber rather than walk. We are all guilty of this in some shape or form. This phenomenon is known as lifestyle inflation.

According to Montara Wealth Managing Director, David Hancock, the key to getting on top of lifestyle inflation is by building yourself a solid financial base.

“The hardest part for anyone trying to build wealth is starting out. Sometimes the mountain can seem impossible to climb but making those initial sacrifices early in life will lead to financial success down the line.”

The earlier the better

The importance of building yourself a base before you decide to settle down, start a family or change careers is paramount to allowing yourself to enjoy lifestyle inflation. David points out the value of doing this before you begin to incur additional costs such as:

  • Increased mortgage or rent payments as you start a family
  • Additional costs such as day-care and school fees
  • Potential reduced incomes if one parents takes carers leave or works part time

The above costs could potentially impact your ability to borrow and therefore reinforce the value of putting in place a financial strategy earlier in life that will take the financial pressure off you during these years. Making sacrifices early will provide you with the flexibility to enjoy different phases of your life without the financial pressures.

The hardest step is the first step

Working out what you value and where you want to head in life is the first step. Everything you are doing now is setting you up for the future. Building a solid asset base is going to enable you to begin the wealth building process, but then also allow you the time and freedom to spend your money as you want.

To build that base, David Hancock suggests planning for one hard year of saving to purchase your first property or invest in shares.

“One year is a realistic commitment to make to save as much as possible and it will make a big impact in the long-term. The year after, you will then have the freedom and ability to spend on something you want, like an overseas holiday or new car. Once you get going and build a base behind you, the investments you own start to work for you quietly in the background.”

Assuming you put down a 10% deposit to purchase a $500,000 home, you will need to save roughly $70,000 to cover a deposit, solicitor fees and stamp duty. This will allow you to have a base working for you, and for the next 3 years you may decide you want to save for a holiday, a new car or set up your own business with the confidence that you have a foot on the property ladder and an asset working for you.

This table highlights the importance of purchasing a home, sooner rather than later and the significant increases in median property prices in Sydney, Melbourne, and Brisbane every 10 years.

Sydney average dwelling price Melbourne average dwelling price Brisbane average dwelling price Aust. Population
1970 $18,700 $12,800 $11,000 12.5 million
1980 $69,700 $43,500 $34,700 14.7 million
1990 $175,000 $147,000 $110,000 17.07 million
2000 $328,000 $253,000 $155,000 19.15 million
2010 $624,000 $559,000 $460,000 22.3 million
2020 $950,000 $730,000 $540,000 25 million

For example, if you had purchased a home in Sydney in 2010 the median house price was $624,000. 10 years on, the median house price has increased by $326,000 to $950,000. This shows the impact that waiting to purchase a property can have, and how you can build your wealth substantially if you purchase the right property sooner rather than later.

Run your own race

The extraordinary rise of social media in many of our lives can make us feel like we are not keeping up. Holidays, cars, parties, and restaurants fill our feeds and portray the illusion that we are missing out and that we aren’t making enough money. But it is important to remember that social media is only a small snapshot of other’s peoples highlight reel and not the daily reality for most.

It’s human nature to compare ourselves to other people, however, don’t let the illusion of others wealth and spending habits impact your financial objectives.

Work out what financial goals you are striving for based on what you want, not what will allow you to “keep up with the joneses” to  and develop a financial strategy to achieve these goals.

Despite the impacts of lifestyle inflation, it is possible to build wealth, even if your spending has risen. The key is to understand your financial goals, make saving a priority for a short time and then invest for the long-term. Soon enough you’ll find you’re able to spend on things you want, without it jeopardising your wealth goals.

To discuss the topic of lifestyle inflation further, or to have a free consultation with a member of our team please click here. 

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