“Shielding Your Wallet: Combatting Lifestyle Inflation in 2025 with Oran Hall”

The celestial beings have ceased their melodies, yet there are omens from 2024 suggesting that 2025 will not be entirely favorable; it may be beneficial for some while not for others.

Despite the struggles faced by those encountering setbacks, there is no certainty that those profiting from the advancements in 2025 will genuinely be in a better position, as peril looms for individuals who fall victim to lifestyle creep.

Lifestyle creep, or lifestyle inflation, denotes the phenomenon where spending rises alongside increases in income primarily aimed at enhancing the standard of living. As more financial resources are channeled to expenditures, what were once regarded as luxuries morph into necessities.

Among those poised to achieve higher earnings are emerging professionals who receive promotions or earn more through consulting and diverse business ventures, motivated by image and social status; individuals nearing retirement who earn more than ever before while spending less due to having settled their loans and no longer being responsible for dependent children; and recent retirees who have accessed their 25 percent tax-exempt lump sum from their retirement funds, in addition to receiving their pension and utilizing their retirement savings and investments. Moreover, we must acknowledge those transitioning into better-paying positions by switching employers.

There are additional individuals likely to have more disposable income in 2025. Some may have secured substantial bonuses in the previous year, which they managed to safeguard efficiently. Others might have profited from investments, sold an asset, received an inheritance, or gained a considerable payout from an insurance claim. Also noteworthy are those who might receive a sizable bonus before the year concludes, perhaps following the finalization of a new collective labor agreement featuring retroactive pay, or employees set to obtain a 2025 year-end bonus.

An increase in income coupled with decreasing expenses leads to enhanced discretionary income, thereby amplifying spending capacity. The genuine risk lies in the possibility that funds earmarked for savings and investments could be redirected towards acquiring luxury vehicles and additional automobiles, for instance, or financing pricier dining options, vacations, and living arrangements. This issue becomes even more pressing for individuals feeling compelled to compete with peers perceived to be thriving, or those wishing to compensate for what they believe they missed out on previously.

This inclination to spend more as income rises is seldom evident. It’s no surprise it’s referred to as silent inflation. This aspiration to elevate one’s standard of living can counterproductively result in a decline of that very standard. Impulsive spending can lead to rising debt and diminished savings, the latter of which reduces the ability to invest and eliminates a crucial safety net that could be invaluable during crises and emergencies.

The year 2024 has passed on a mix of positive and negative elements to 2025. The positive aspects encompass inflation remaining within the target range established by the Bank of Jamaica, BOJ, although many still lament escalating prices and financial strain; low unemployment; governmental investments in infrastructure; a relatively steady exchange rate; and initiatives by the BOJ aimed at reducing interest rates. However, this presents a complex situation. When lenders eventually revise borrowing rates, obtaining loans should become more affordable. Conversely, savers and investors in interest-generating securities are already witnessing reduced returns. A significant downside exists in the form of an economy that lacks robustness – at times exhibiting weak growth or even negative growth – underscoring the need for caution.

Numerous individuals will continue to experience financial strain, with new ones joining their ranks, though others will fare well. Thriving financially doesn’t eliminate the need for budgeting; in fact, it becomes increasingly vital to curtail unrestrained spending and allocate funds toward investments.

An effective technique for creating and managing a budget involves defining each expenditure item as a percentage of total spending, which should also be expressed as a percentage of total income. This allows for potential increases in spending where necessary, while maintaining a degree of control. It’s equally essential to express savings and investments as a percentage of total income. Constantly questioning each financial decision remains critical. By adhering to this method, there should be greater available funds for savings and investments, to address emergencies, and to tackle other significant financial issues.

Earning increased income in 2025, just like any other period, can be advantageous when managed appropriately. Adjusting spending to align with income increases—or worse, spending beyond that—does not constitute an optimal approach to enhancing financial health. Hence, seize the opportunities for additional earnings, but steer clear of lifestyle creep.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, extends advice and counsel on personal financial planning. [email protected]