In 2014, I was a student at the University of Lagos, earning NGN20,000 monthly as pocket money. It felt enough, and I was content. However, as the months progressed, I unlocked new sources of income and tripled my earnings. Suddenly, NGN60,000 was not enough for me–the same me surviving on NGN20,000 a few months before.
Did I budget? Yes, I was an excellent budgeteer! So, what went wrong? Lifestyle inflation. Most times, we budget by assigning random values to expense items.
For example, at NGN20,000, I would assign NGN10,000 to feed costs. But when I clocked NGN60,000, I was spending as high as NGN45,000 on feeding. My taste changed, and I wanted more quality (I don’t think you should blame me for this).
What is Lifestyle Inflation?
Generally, inflation refers to the increase in the cost of items. Lifestyle inflation is similar to this. Think of your lifestyle as a good you pay for with your earnings.
Hence, lifestyle inflation is the rise in your lifestyle expenses. But this time, the driver is your earnings. At NGN200,000 per month, you were okay with spending NGN2,000 to get a decent meal, but now you want to spend NGN10,000 for a good meal experience.
Does this mean you should keep your taste the same as your income increases? Does this mean you don't have the right to enjoy the better things in life now that you can afford them? The answer to both questions is no.
What I am driving at is this; you need to stop budgeting--at least not the way you know how to. The traditional budgeting style is in bed with lifestyle inflation.
Why does (Traditional) Budgeting Fail?
Traditional budgeting focuses on allocation. As long as you can tell where your money goes, you are fine. But as you have seen, with earlier explanations, that is dangerous. You will end up increasing your expenses to take up your income.
Another downside, giving our propensities to spend, is the savings impact. For example, some people start by saving NGN20,000 on a NGN200,000 salary. When that increases to NGN500,000, they stick to NGN20,000 savings still.
To fix this, one must ask percentage questions like:
- What percentage of my income should I spend?
- What percentage of my income should go to investing?
How should you Budget?
Work with caps as your income increases as a salary earner or entrepreneur. A cap ensures that there is a balance though your expense items increase. In essence, you'll move from random values to efficient values.
Budgeting is not just about allocating values but efficiently managing your income flow.
To use caps, work with percentages. That way, even if your expenses increase, they won't take more than a specific part of your income. In the same vein, your investments will increase as your income increases.
A general rule for percentage allocations is the 50-30-20 rule. This suggests that 50% goes to necessary expenses, 30% to wants, and 20% to paying down debts/investing.
You can adjust this rule to fit your taste, but ensure it is consistent for a reasonable period. If you start budgeting this way, you are set to combat lifestyle inflation and crush investing goals.