Diana Clement: Get yourself free of lifestyle inflation trap

Sometimes we can never get enough of what we don't need. Photo / Doug Sherring

Sometimes we can never get enough of what we don't need. Ever met someone earning a six-figure salary who can't make ends meet? Chances are this person once lived on a student grant or loan. Along the way his or her lifestyle has inflated to meet or exceed the available cash.

According to a RaboDirect survey this week, half of Kiwis don't save - and it's not always the ones on the low incomes who struggle to put money away at the end of the month.

That's because it's normal in our society to start spending a raise as soon as you get it. Until the past couple of years that often meant moving to a bigger or flasher house or getting a better car as soon as you got a promotion.

What's more, your view of what essentials are changes. That great student favourite of macaroni without cheese is beneath your culinary expectations and you now buy premium brands, not budget ones. After all, you wouldn't want to be seen going through the checkout with budget goods.

Lifestyle inflation happens to virtually all of us in one way or another. Some of the things that are "essentials" on my shopping list are pretty hard to justify - such as smoked salmon and fresh parmesan cheese.

When your lifestyle inflates, so does your sense of what you "deserve". And sometimes we can never get enough of what we don't need.

Dr Michael Lee, senior lecturer in marketing at the University of Auckland Business School, says marketers don't have to try that hard to take advantage of individuals' lifestyle inflation.

The concept of "liminal transition" does that for us.

Liminal transitions are part of the life stage process and occur when you move from one state of being to another - such as leaving school, starting your first job, getting a promotion, changing job or even getting married or divorced.

Your personal and societal expectations change at that point of liminal transition, says Lee.

"People want to know how much more [money] you are getting and they expect to see a change in you in some way when these liminal transitions occur.

"Also, when you get great responsibility you expect some reward for [the] privilege. The way [to reward yourself] in this day and age is to spend and consume more.

It is expected. It is a normal part of this society we live in. You have this liminal transition and your consumption and lifestyle changes."

Manufacturers and marketers are a bit guilty of producing or promoting brands that are used as markers or symbols of where a person is in their lives, says Lee. That's why a Glasson's handbag might do when you're 18, but you need a designer one by the time you're 25.

Aucklander Jill Porter fell into the lifestyle inflation trap during a successful 20-year career with pharmaceuticals company Bayer Group. Even when Porter was transferred to the United States and given a six-figure US dollar salary, she still managed to spend it all and more.

"I was living in a financial fog," she says.

"I travelled all the time and would virtually never pass through a duty-free shop without having to get something - and I'm not talking fridge magnets. It was always arty jewellery. I knew where all the best stores were all over the world."

A new partner gave her an ultimatum: her spending, or him. Realising she needed help, Porter visited a psychologist and financial adviser, but couldn't connect the advice from the two of them. Like diets, get-out-of-debt calculators can be hard to stick to, she says.

Eventually she Googled "overspending" and ended up getting help from the Financial Recovery Institute, which she now operates the New Zealand arm of. The institute's programme involved counselling, keeping a journal and personalised teaching about money. "There were a lot of 'aha' moments for me," says Porter.

Porter ascribes her overspending and lifestyle inflation to being forced to be independent at a very young age. Financial problems are often linked deep into individuals' psyches and may be due to insecurity or guilt. It could be the fact that your needs weren't met as a child and you are now making up for that. Hence the cure comes from within.

People like Porter balk at being given a budget. What made the difference was having the emotional triggers of her spending highlighted.

The symptoms are often exacerbated by the Joneses next door or at work. They've got a better car, better clothes, nicer holidays and a better social life. Or so it seems from over the garden fence.

Getting a better job and bigger income doesn't necessarily bring happiness. One American writer for the Get Rich Slowly blog put this into words perfectly when she likened her lifestyle inflation as having sold herself into slavery for a job that didn't give her a great deal of satisfaction in order to have more money to spend. The only trouble was that the money wasn't bringing happiness.

So instead of using pay rises to buy more things that didn't bring happiness, she reconfigured her life to save pay increases. "It turned out that what I wanted wasn't more money after all," she wrote.

Every rise she received gave her the opportunity to "buy freedom". Depending on your situation, buying freedom can mean anything from paying your way out of debt to investing now for an early work-free retirement.

Once she'd cleared debt and set up an emergency fund, she could save for retirement, rather than to pay off past purchases.

Our spending may increase as our lifestyles inflate with each liminal change, but often savings are left behind. Jeff Matthews, senior financial adviser at Spicers Wealth Management, points out that when people's income increases, they should be increasing their savings as well as their spending.

Matthews cites an ING advertisement that he saw on American TV while on holiday recently that asked "what's your number?" The sub question was what income do you really need in retirement and how are you going to achieve it.

Most people have no idea what that number is, says Matthews. Once you know that number, you can start working out how much you need to save.

"If it's a $50,000-a-year lifestyle for 20 years (after retirement), you would need $743,874 of capital to fund it," he says.

It's not unusual, says Matthews, to have a client who started a savings plan years back and has never reviewed it.

Matthews likens reviewing your savings to a one-day cricket match where you start out needing a certain run rate to reach your target.

Saving, however, isn't a straight-line event. Something such as the birth of children, divorce, or even the global recession gets in the way and you need to make up for lost runs by saving more. It's not going to happen if your lifestyle is inflating at the same rate as your income.

Sometimes it takes a shock such as a recession or redundancy for people to realise how they've allowed spending to keep pace with pay increases.

By then it can be too late because it's awfully difficult to downsize if you've got used to your comfortable lifestyle.

That's thanks to another concept - loss aversion, says Lee. That means you don't want to lose what you've gained.

For example, once you become accustomed to certain consumer goods, but have to give them up, you focus on the loss of functionality, prestige or symbolism of that item, not the affordability.