Have you heard of Lifestyle Inflation? If you have not heard this phrase, you probably know the feeling. Some may call it “keeping up with the Joneses,” but it’s the idea of increasing spending as more money becomes available (for example a raise or inheritance). A better plan for extra money would be to consider building your financial security.
One approach is to adopt the 80/10/10 method. This means that 80% of your budget is spent on your fixed and variable expenses, 10% goes to savings, and 10% is allocated for your tithe. It’s important to live within your means, and living on 80% of your income allows you to do this. In addition, the 10% that goes to savings can be used in many areas – creating an emergency fund, building cash reserves, and saving for retirement.
If you’re already living an 80/10/10 lifestyle and you see your income increase, you may have the ability to increase your personal spending while also increasing the amount you save. It’s like having the best of both worlds. Of course, if your retirement account needs attention, and you don’t have an emergency fund established, we recommend those areas be prioritized.
Additionally, we recommend that you do not lump your emergency fund with existing checking or savings accounts. It’s best to park it separately so that you don’t accidentally (or intentionally) use those funds for purposes other than emergencies. Also, consider placing the money where you can earn interest, allowing the value to increase over time, like an AGFinancial Demand Certificate.
To learn more about managing your finances, we recommend the following articles:
5 Ways to Declutter Your Finances
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