For many, the idea of spending in a lavish way is incredibly enticing. The issue is that some of the habits that come with it can dramatically harm your financial well-being. Here’s a look at eight luxury spending habits that could lead to financial ruin.
1. Lifestyle Inflation
One spending habit that typically leads to financial trouble at some point is falling victim to lifestyle inflation. Essentially, this means increasing spending levels whenever more income comes into the household, often by sacrificing opportunities to save more or reduce debt.
Many people succumb to lifestyle inflation under the notion that they deserve some niceties because their income went up. While some alterations in spending habits can make sense when more money is available, such as buying healthier food that can promote better health, not all of the extra outgoing cash goes to costs like that. And since lifestyle inflation usually means more spending and not more saving or debt reduction, it prevents a person from improving their financial position in a way, and that can lead to hardship if an unexpected decrease in income occurs.
Generally, it’s better to assess how an income increase impacts the household’s budget. Then, allocate some (or preferably most) of the extra money toward critical financial goals, like debt reduction and savings. Finally, see if a few budget categories could benefit from a slight uptick and decide where the rest of the available income provides enough value to justify an increase.
2. Lavish Vacations
While taking a break from work isn’t a bad idea, as it can help ensure a person’s well-being, lavish vacations can take a toll on a household’s finances.
While wealthy families may be able to take off to other countries, stay at high-end results, and otherwise choose luxurious options, trying to do so on a more modest income can be financially catastrophic. The issue is even worse if a person turns to debt as a means of financing the trip, leaving them with interest to contend with, too.
Paring back when planning a vacation can certainly be a bit disheartening, but it’s the better choice if going all out isn’t a wise financial move. Plus, there are many amazing options – including less expensive destinations or even staycations – that can provide the needed respite without breaking the bank.
3. Spending Spontaneously
Even higher-income households can run into trouble if they spend without thinking. Without assessing their financial picture before committing funds, it’s easy to accidentally overspend, putting them in a troublesome spot.
While being able to spend without thinking may seem like the ultimate luxury, it’s not a wise approach. Instead, it’s better to keep an eye on the broader picture and follow a budget, ensuring a spontaneous purchase doesn’t lead to financial struggle.
4. Assuming a High Price Means High Quality
It’s easy to assume that spending more means you’re getting a better-quality item, making the initial investment worthwhile. However, sometimes, an item with a massive price tag doesn’t offer substantially more lifespan or functionality.
As a result, that big purchase may need repeating far sooner than you’d expect, and over time, the total spent on that product category can add up fast.
Instead, spend time researching the various available options across an array of reasonable price points and assess their quality. By doing so, there’s a good chance of finding a suitable product with good longevity that won’t break the bank.
5. Buying High Depreciation Assets
Specific assets – particularly new vehicles – are known for high levels of depreciation once they’re purchased. Once driven off the lot, it’s common for many people to owe more on their auto loan than the car is worth, and that can put them in a bad financial position should the vehicle become damaged and need replacing (even if with solid insurance).
Generally, there are two ways to avoid the traps that can come with high depreciation assets. In some cases, paying cash instead of financing works, particularly for anyone who plans to own the item for a substantial amount of time.
Alternatively, going with a used version may work well, as the bulk of the depreciation has already occurred, and that’s reflected in the purchase price.
6. Justifying Shopping Because of a Sale
While getting a solid discount on an item or service you genuinely require is excellent, using a sale to justify an unnecessary purchase is problematic. If a person buys anything that doesn’t address a need, it’s money wasted regardless of the price. The amount of money saved is irrelevant, as superfluous spending is what actually occurred.
Before buying an item – regardless of its price – consider whether it’s something the household genuinely requires. If not, bypass the item and keep the money that would have been spent in the bank.
7. Not Negotiating
Higher-income households may assume that negotiating on big-ticket items is unnecessary if they have the money available or can finance the purchase. However, whenever buying something where negotiating is an accepted practice, it’s always best to try for a reasonable price reduction. Ultimately, that allows the buyer to keep more of their hard-earned cash, and that’s never a bad thing, regardless of their income level.
8. Keeping Up with the Joneses
For some, ensuring they appear to have the same financial status as the people around them is a driving force. The issue is that keeping up with the Joneses often leads to spending beyond their means. They end up dedicating income to activities and belongings mainly as a way to maintain appearances, and that can lead to financial irresponsibility.
Plus, keeping up with the Joneses can cause a person to buy things they wouldn’t even want if it wasn’t for pressure from their social group. Essentially, along with overspending, they aren’t focused on their own priorities. That can lead to significant dissatisfaction, as well as eat up a large chunk of their income.
Do you know of any other luxury spending habits that can lead a person toward financial ruin? Have you made some of the missteps above and want to tell others about what happened or how you recovered? Share your thoughts in the comments below.
Read More:
- The Penny-Wise Trap: 11 Everyday Items That Cost More to Skimp On Than Splurge
- Credit Card Catastrophes: 12 Debt Traps Smart People Fall Into Without Realizing
Tamila McDonald is a U.S. Army veteran with 20 years of service, including five years as a military financial advisor. After retiring from the Army, she spent eight years as an AFCPE-certified personal financial advisor for wounded warriors and their families. Now she writes about personal finance and benefits programs for numerous financial websites.
