Lifestyle inflation is the silent enemy of your goals

How do you celebrate after getting a promotion? Do you go to dinner, take a weekend getaway, or finally buy that new car you’ve had your eyes on?

If you’re like most people, you might start checking off a list of items you’ve been wanting. The problem is that you’re probably not even thinking about the silent enemy of your financial goals — lifestyle inflation.

Whatever you hope to lean FIRE, fat FIRE, or anywhere in between, it’s important to understand how this lifestyle creep can stand in between you and financial independence.

This article explains how lifestyle inflation can slowly take hold of your finances, how to avoid it, and how to out of the hole if you’ve already fallen victim.

What Is Lifestyle Inflation?

What is lifestyle inflation?

Lifestyle inflation, also known as lifestyle creep, is a phenomenon where an individual’s spending habits increase in lockstep with their income. When they receive a raise, bonus, or any other windfall of money, they quickly spend it rather than improving their savings rate.

As a result, those who experience lifestyle inflation are never able to improve their financial health. With more discretionary income, they should be able to repay debt, build an emergency fund, or invest more meaningfully.

Instead, they put on those golden handcuffs — shackling themselves to work and preventing themselves from ever reaching financial independence.

Unfortunately, lifestyle inflation is a fairly natural response that the “treat yourself” movement has only exacerbated. And it affects everyone across all socioeconomic classes. But make no mistake — it is a trap.

Lifestyle Inflation Example

Here’s an example of how lifestyle creep can quickly add up:

Let’s say you have pulled in $60,000 per year for the past six years. But after teaching yourself a high-income skill, you land a new job opportunity with a $90,000 salary. Incredible! You absolutely deserve to be proud and to celebrate modestly.

But if you’re not careful with your spending decisions, much of this extra income can be gone in the first few weeks.

Perhaps you’ve been driving around an old beater. And you think it’s time to upgrade so your car blends in around the parking lot. The new Nissan Maxima looks nice, and hey, it’s not a BMW — you’re not going wild. So you trade in your old vehicle, fork over a downpayment of $3,000, and take out a 7-year car loan at $500 per month.

Next, you excitedly start apartment hunting. After all, you hate your noisy neighbors. And how can you be a high performer if you can’t get the sleep you need? So you move out of your $1,500 one-bedroom apartment and find a swankier new spot around other high earners.

At $2,600, you know it’s a little steep. But you convince yourself that this is the point of pulling in a higher income. Now, you’re living the life. You get access to a gym, a pool, a sauna, and a nice clubroom.

Finally, you decide to go out with your friends to celebrate the huge changes you have made in your life. They are happy to see you enjoying your financial success, so you enjoy more drinks and appetizers than you normally would. It feels good to enjoy your new raise and not have to worry about money, so you make it a regular occurrence.

Fast forward a few months and it hits you. You look at your bank account and wonder where all the money has gone. Your 50% pay raise hasn’t translated into any savings or wealth.

After taxes, your take-home pay increased by about $1,800 more per month. But your increased living expenses have completely eaten up that extra income. Although every individual decision felt justifiable, you are no closer to financial freedom than you were before.

The Role Of Social Comparison And Status Seeking

Everyone wants to keep up with the Joneses’ but no one wants to foot the bill. And social media has only exacerbated this problem.

People often make the mistake of trying to look rich without actually being rich. From renting luxury cars to staying at expensive resorts, it has become much easier to dress up your lifestyle and put on a front.

Whether it is to fit in, get likes, or look successful, the pressure to live the way others do (or the way they pretend to) is significant. But this rarely leads to lasting happiness and satisfaction.

Instead, you may find yourself slippery slope that can quickly become an addiction of sorts. So don’t let your social media feed influence your purchasing decisions. Focus on avoiding lifestyle creep and pursuing your long-term financial goals.

The Dangers Of Lifestyle Inflation

The long-term dangers of lifestyle creep

A few impulse purchases here and there might not seem like the end of the world. But lifestyle creep can slowly but surely chip away at your financial security. Here are a few of the key dangers:

The Impact On Your Financial Goals

Personal finance is just that — personal. People make different financial decisions, even in similar circumstances, because their underlying values and objectives are different.

So whether you want to avoid lifestyle inflation entirely or just minimize its impact, develop a plan to monitor your spending and stay on track with your financial goals. This will ensure that lifestyle creep doesn’t derail your progress toward getting out of debt, building an emergency fund, or investing for retirement.

The True Cost Of “Upgrading” Your Lifestyle 

The sticker price is rarely the total cost. And that goes for everything from home and car ownership to lifestyle expenses.

The reality is that once people get a taste of the finer things, they rarely reign it back in. The things they previously enjoyed become less satisfactory and what was once a treat is now an expectation. That’s why the “just this once” mentality is a fallacy.

As a result, the true cost of lifestyle inflation is not just the one-time cost of a purchase. It’s the aggregate cost of all the subsequent spending, which is much harder to conceptualize.

How It Can Become A Cycle

Lifestyle inflation is often likened to a hedonic treadmill. Because no matter how fast you run, you will never reach your destination.

There is always a new car model, a nicer neighborhood, and a fancier restaurant. So as long as your goals are external, and not internal, you will continue chasing a moving target.

As your income increases, so will your expenses, and you will find yourself living paycheck to paycheck. Even if you make six figures.

How To Avoid Lifestyle Inflation

How to avoid this phenomenon altogether

Avoiding lifestyle inflation is not rocket science. Here are a few tips to establish good habits and keep you on track:

Tip 1: Be Conscious Of Your Spending

The number one way to avoid lifestyle inflation is to be more conscious of your spending. There’s no way around it. If you want to save more money, you need to pay close attention to where it’s going.

Start by setting up a budget planner and allocating a portion of your income to your fixed costs, discretionary spending, and savings goals. This way you can enjoy certain luxuries and protect your financial health.

If you find this budget hard to enforce on a day-to-day basis, consider testing cash envelopes. A cash-based system is much more rigid and ensures you don’t overspend or accidentally tap into your savings.

Tip 2: Set Up Automatic Savings

Any time your income increases, decide what percentage you would like to save versus spend. If your annual income grows by $5,000, for example, you may choose to contribute $2,500 to your savings goals and the other $2,500 toward new experiences.

Then, open up a high-interest savings account and create a monthly recurring transfer. This fixed amount will be set aside automatically each month before you are even tempted to spend it. Consider this your minimum savings rate. The rest can be spent on lifestyle choices, as long as you adhere to the spending limit.

Tip 3: Find Cheaper Alternatives

Avoiding lifestyle inflation doesn’t have to mean skipping out on entertainment altogether. You just have to find more affordable alternatives.

For instance, instead of going to a fancy restaurant for dinner, you can recreate the same experience at home with a candle-lit dinner and a few special ingredients. And rather than staying at an all-inclusive resort when you travel, you can find an Airbnb off the beaten path and try more authentic activities.

Tip 4: Do It Yourself

Another way to reduce your spending is to DIY whenever possible. This can be anything from home improvements and gardening to haircuts or clothing repairs.

Oftentimes, after a little research and a few YouTube tutorials, DIY projects can be surprisingly easy. Plus you get to feel the satisfaction of tackling something yourself. And once you pick up a new skill for the first time, you will benefit from the savings again and again over time.

Tip 5: Avoid Debt

Bad debt, like credit cards and personal loans, can fuel lifestyle inflation without you even realizing it. These forms of debt are notorious for their high-interest rates which can quickly turn a bad decision into a full-blown financial crisis.

So if you must borrow money, only use it to acquire assets not fund expenses. Investments, businesses, and real estate can all be legitimate reasons to take on new debt. Shopping sprees, vacations, and lifestyle upgrades are not.

Tip 6: Delay Gratification

To prevent lifestyle inflation, practice delayed gratification. Instead of buying everything you want right away, slow the process down.

Make a list of items you want and prioritize them. Wait a few weeks and if you still want the item at the top of the list, go ahead and buy it. Then, a few weeks later, if you still want the second most important item, go ahead and buy that one too.

By simply delaying the rate at which you spend money, you will end up spending less and saving more. So don’t think that you have to sacrifice everything you want in life — you just have to wait.

How To Combat Lifestyle Inflation

How to combat lifestyle inflation

If it’s too late to prevent lifestyle creep because you already live paycheck to paycheck, all hope is not lost.

There are a few simple steps you can take to get your finances back on track. Follow this 3-step formula to reduce your spending and pad your savings account.

1) Write Out A List Of Expenses

If you are barely making ends meet despite a recent increase in income, start by making a budget. Take this opportunity to review your expenses and identify where there have been spending increases. This will help you pinpoint exactly where your money is going. 

Categorize your spending into categories like:

  • Rent or mortgage
  • Car payment
  • Groceries
  • Utilities
  • Phone bill
  • Insurance
  • Streaming services
  • Entertainment

2) Cut Out Anything Unnecessary

Next, take a step back. Ask yourself if your spending on any of these categories surprises you. Are any expenses unnecessary or easy to scale back on?

If you think you can live without something, give it up for just 30 days or one billing cycle. By the end of the month, you will have more savings and a clearer view of how important that expense is to you. Then, either revert or cancel it permanently.

From your gym membership all the way to streaming services, this process will help you save money by eliminating everything that you don’t absolutely need.

3) Adjust Your Financial Goals

As you move through life, your goals are likely to evolve. This isn’t necessarily a bad thing — it’s the inevitable result of having more context and perspective.

Perhaps you make more money than you did previously, but you also have three children and a dog. If this wasn’t factored into your original plan, you may need to revisit your goals.

But don’t just accept defeat. Update your previous assumptions and look at your budget with a critical eye. Brainstorm how you would use any extra money for the future if you had it today. Remember your answer and hold yourself accountable to this goal after your next raise.

Related reading: 21 Personal Finance Ratios That Will Boost Your Financial IQ

Final Thoughts

Left unchecked, lifestyle inflation can wreak havoc on your finances. It can prevent you from saving more money, leveling up in life, and reaching your financial goals.

To avoid falling victim to lifestyle inflation, use the 6 tips outlined above to balance your financial and lifestyle goals. They can help steer you in the right direction toward financial security.

And if you have already fallen into the trap of lifestyle inflation, follow the simple budgeting process we just discussed. Be sure to take it one step at a time and remember that sustainability is more important than speed.

Lifestyle inflation is dangerous, but it doesn’t have to be permanent. No matter how far you’ve gotten off track, you can always turn your financial situation around with the right plan and guidance.

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