Lifestyle Inflation and How to Avoid It

lifestyle inflation

You know all about economic inflation. You feel it in your wallet and bank account every time the dollar loses a bit of its value and the price of milk, gasoline, or anything else jumps another digit. But what about lifestyle inflation?

It sounds funny, but it’s a real concept that could be the invisible culprit behind your financial woes.

What Is Lifestyle Inflation?

Also known as “lifestyle creep,” lifestyle inflation occurs when you increase your household spending every time your income grows. If your spending habits don’t change – or even get worse – with increased earnings, you’ll find yourself struggling with the same issues you did when you only made that entry-level salary. In other words: more money, same problems.

How People Fall Into Lifestyle Inflation

It’s all too easy to fall into a lifestyle inflation spiral. Most of us become a victim of it without ever realizing it because the changes occur gradually– and have ongoing consequences.

Perhaps you treat yourself to a new car after your first raise at work. After all, you couldn’t keep driving your beat-up Honda forever, right? But that purchase loads you with a big new debt and a series of repayments, stealing most of your extra income each month.

Then you receive a generous bonus and decide it’s finally time to take that cruise you’ve been dreaming of for years. The cruise is a wonderful week that creates a host of delightful memories, but it leaves you with a large bill and an empty place where your bonus money used to sit.

This pattern continues because every purchase, splurge, or change feels deserved. And some of it undoubtedly is! Unfortunately, at the same time, this lifestyle inflation sucks your bank accounts dry and effectively steals your (increased) pay. A family that makes and spends $500,000 a year may not have any more money in savings than a family that makes $45,000 a year and spends every dollar of it to survive.

Ways to Avoid It

There’s a little bit of good news here. As long as you know how to recognize lifestyle inflation for the villain that it is, you can take easy steps to avoid it.

First, never take on new debt, like a car, home, or furniture, simply because you can “finally afford it.” Adding that extra monthly payment to our budget wipes away your ability to pay off old debt, add to a savings or investment account, or stash money away in an emergency fund. Choose your purchases wisely, and save long enough to pay in cash (or to pay in full, if you charged it) whenever possible. Avoiding those credit-card interest fees will save you thousands of dollars in the long run.

Second, don’t fall into the trap of “keeping up with the Joneses.” There will always be a neighbor or friend or relative that has more than you. Whether it’s a foreign car, expensive sports lessons for their children, or a backyard pool, you don’t need to spend tens of thousands of dollars to prove your worth. Concentrate on what really brings you true happiness.

Finally, make a budget. Make it right now. Give every dollar a purpose, and hold yourself accountable to put a certain amount into savings every month. If you can pay all of your bills, pay down existing debt, put money aside for retirement or other long-term goals, and still have money left over, then you know how to wisely spend your “fun money” to bring you the most joy.

The Bottom Line

Lifestyle inflation is like the little voice in the back of your head telling you to spend more and more, “because you deserve it.” If you can keep that voice quiet, you can avoid the ultimate danger of lifestyle inflation: living paycheck to paycheck with no backup plan or savings, and never having enough – despite your hefty household income.

Don’t wait to get out of debt! Read this: A Complete, Step-By-Step Guide to Get Out of Debt.

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