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What Is Lifestyle Inflation?
Lifestyle inflation refers to an increase in spending when an individual’s income goes up. Lifestyle inflation tends to become greater every time an individual gets a raise and can make it difficult to get out of debt, save for retirement, or meet other big-picture financial goals. Lifestyle inflation is what causes people to get stuck in a cycle of living paycheck to paycheck where they have just enough money to pay the bills every month.
Key Takeaways
- Lifestyle inflation refers to a situation where an individual’s income increases and their spending also increases.
- Common events that can trigger lifestyle inflation are graduation from college, a job promotion, or a significant raise.
- Lifestyle inflation can result in situations where people place great emphasis on the acquisition of objects in order to achieve happiness.
- Strategies to avoid lifestyle inflation include prioritizing financial independence and valuing experience over the acquisition of objects.
Understanding Lifestyle Inflation
Lifestyle inflation, or lifestyle creep, is when your spending rises to keep pace with an increase in pay. Instead of having “extra” money to put toward savings, you find yourself spending it instead. Though you’ve earned more money, it doesn’t feel like more money because you’ve spent it.
One common occurrence of lifestyle inflation is during the transition from college student to full-time employee. Despite surviving on very little money as a student, once a first paycheck arrives, things that were once “luxuries” can easily become “necessities,” resulting in increased spending.
For instance, sharing a two-bedroom apartment with three other roommates to keep housing and utility expenses down suddenly seems less attractive when you have a steady paycheck coming in. Lifestyle creep would be upgrading to a one-bedroom apartment so you can live alone; the extra money coming in from the new job is diverted to the increased rent.
An Example of Lifestyle Inflation
Here’s an illustration of how lifestyle inflation works: Imagine a college student named Gal. In college, Gal worked odd jobs as a server and a library assistant to make ends meet. Gal shared a three-bedroom apartment off-campus with two other students and subsisted on sandwiches and ramen noodles to trim costs.
After graduating from college, Gal found employment at a bank in the city. New job secured, Gal moved out of the shared apartment and into a studio. Without roommates to split the rent, Gal’s monthly housing costs increased. Gal also adopted a pet and joined a boutique fitness club, two luxuries that weren’t possible as a student but which further increased monthly expenses. And with a little more free time, Gal took the opportunity to taste the cuisine at the city’s best, Michelin-starred restaurants—quite a bit more expensive than sandwiches and ramen.
Although Gal earned more money with a full-time job, Gal’s spending habits also increased to keep pace: this is lifestyle inflation. If Gal wanted to combat this lifestyle creep, the wise choice would be to set aside a portion of each month’s income in a savings account and in a Roth IRA.
Strategies for Avoiding Lifestyle Inflation
Lifestyle inflation causes many people to live paycheck to paycheck, struggle to pay their bills, make the minimum payments on their credit cards, and lack the cash resources to fall back on when an unforeseen setback like a medical bill or job loss occurs.
People tend to increase their spending when their income increases. This may be because they believe that the additional goods and services they can now buy will make them happier. However, what can happen instead is a feeling they’ll never get ahead. Combatting this requires increasing savings instead of spending.
It’s possible to avoid lifestyle inflation by consciously establishing spending and saving amounts.
Setting up an automated savings plan can be a good way to ensure you meet your savings goals and that spending is capped.
By avoiding lifestyle inflation, you can achieving financial independence at a younger age, have the financial flexibility to choose a dream job over a higher-paying option, and even retire early. Below are some strategies you can use to achieve more financial independence and avoid lifestyle creep.
Calculate Real Changes to Budget
After taxes and expenses, the net effect of a raise is often less significant than it appears. Take the time to calculate the real change to your budget and determine how that extra money is going to impact you.
Plan for Mindful Spending
Instead of indulging your whims as they arise, set a budget that allows you to spend while also saving for the future.
Build an Emergency Fund
Before you start spending your additional income, it’s wise to build yourself a financial buffer for when things inevitably crop up. An emergency fund with three to six months of expenses can provide you the cash to cover emergencies without needing to resort to credit.
Choose Experiences Over Things
If you start making more money, consider investing in experiences instead of buying a new car, house, or wardrobe. Activities such as going on a vacation or signing up for an educational class can create memories that give you lasting satisfaction, and they can be shared with friends and family, too.
Make Gradual Changes
An expensive car might require a pricier mechanic, and a big house requires more upkeep. Huge changes to your lifestyle may come with additional hidden costs. Avoid them by celebrating modestly instead; you still get to mark the milestone while keeping your sights set on your long-term goals.
How Does Lifestyle Inflation Impact Your Ability to Save and Invest?
Lifestyle inflation means you’re earning more and spending more, but not saving more. Rather than putting additional funds aside toward savings and investments, this kind of lifestyle creep finds you upgrading your lifestyle instead.
What’s Wrong With Lifestyle Inflation?
There’s nothing wrong with upgrading your lifestyle as you earn more money; the trouble comes when you don’t increase your savings and investments at the same time. Focusing only on increasing your spending means you’re likely to still live paycheck to paycheck and struggle with creating a financial buffer to protect against future emergencies.
How Do You Know If You’re Experiencing Lifestyle Inflation?
Ask yourself what proportion of your earnings are being put toward wants, needs, and savings. If you’re earning money and only the wants and needs are increasing, you find yourself struggling to pay your bills at the end of the month, or are relying on credit cards to make ends meet, then you may be experiencing lifestyle inflation.
The Bottom Line
Lifestyle inflation can absorb any additional dollars you earn, making it difficult to get out of debt or save for the future. If you’re worried about lifestyle creep, being more mindful with your financial decisions can help, as can gradual changes that help you curb spending, focus on experiences, and build your emergency fund. An upgraded lifestyle can be enjoyable, but you may enjoy it even more if you’re comfortable with your savings and investments, too.