Have you ever had a raise, a promotion at work, or even an extra income source from a side hustle and suddenly found yourself spending more money without being conscious of it? That’s lifestyle inflation in a nutshell, and it can be a serious financial trap!
Spending money is so appealing and enjoyable to do when you have some dough. And while it’s natural to want to reward yourself when you start earning more money, lifestyle inflation can quickly eat away at what should be your savings and prevent you from achieving important longer-term financial goals.
Avoiding lifestyle inflation requires a certain level of awareness and discipline. You need to become conscious of your spending habits and make deliberate choices to avoid increasing your expenses when your income goes up. It’s not always easy, but it’s essential if you want to achieve financial security and independence. That’s the dream no?
In this article, we’ll be looking into what lifestyle inflation is and how it plays out, why it’s important to avoid it, and some of the best strategies for doing so.
What is Lifestyle Inflation?
Lifestyle inflation also known as lifestyle creep is what happens when your expenses increase as your income increases. It is a widespread phenomenon that affects many people, regardless of their income level.
The consequences of lifestyle inflation can be significant. When you inflate your lifestyle, you’re spending more money on things that aren’t income-producing and don’t necessarily increase your happiness or improve your quality of life. This can lead to unwanted hassles like increased debt, reduced savings, and delayed retirement.
Lifestyle Inflation Statistics
Here are a few interesting lifestyle inflation statistics for you to ponder over. According to a survey conducted by TD Ameritrade, 44% of respondents admitted that they experience lifestyle inflation when they receive a raise or promotion. The same survey found that nearly half of the respondents (49%) felt they aren’t saving enough money, and lifestyle inflation was one of the reasons why. A study by Northwestern Mutual found that 33% of Americans believe their spending habits are a barrier to achieving their financial goals.
In another survey done by Bankrate in 2021, only 39% of Americans had enough savings to cover $1,000 worth of unexpected expenses! This shows that lifestyle inflation can be a significant obstacle to building an emergency fund and achieving financial security. By understanding this negative impact of lifestyle inflation and taking steps to avoid it, you can improve your financial situation.
Examples of Lifestyle Inflation
Lifestyle inflation can take many different forms, depending on your personal preferences and priorities. Here are a few real-life examples of how this plays out for people. See if you can relate to any.
- Eating out more often: When people start earning more money, they often treat themselves to more frequent meals at restaurants and order takeout. Hanging out with the guys and the girls after work to unwind becomes more frequent. While dining out can be a fun and convenient way to enjoy a meal, it’s also significantly more expensive than cooking at home.
Eating out frequently can quickly eat away at your budget unintentionally and prevent you from saving money very easily. If you doubt this, try tracking and comparing what you spend eating out and what you spend on home cooking for a month and see the difference. - Buying a luxury car: Another really common way people inflate their lifestyle is by buying a luxury car. Driving your dream automobile around town can feel fancy and fulfilling. But this also comes with significant costs – higher fuel consumption, higher insurance premiums, and more expensive maintenance and repairs being the most obvious ones. People who fall into this one rarely think of all the added costs down the line.
- Upgrading to a bigger house: When people earn more, one of the things they love to do as well is to upgrade to a bigger house or apartment. While having more space can be nice, that comes with certain higher expenses one must not be blind to. Like a larger mortgage or rent payment, higher property taxes, increased utility bills, and other maintenance costs.
- Traveling more frequently: With more disposable income at hand, there is the temptation to travel more frequently or to more luxurious destinations. I really relate to this one as I do love grabbing a chance to visit any exciting destination and see as much of the world as I can. When you see so many beautiful pictures of choice places on the internet and hear tales of how fun these places are, it can be such a hard thing to resist!
Travel is a wonderful way to explore the world and experience new cultures but it can also be expensive. Costs include airfare and ground transportation, lodging, meals, and tourist activities which can add up really quickly. Now imagine spending this way when you have no emergency fund, tangible savings, or smart investments running. Do you see how damaging it can be to your pocket in the long run when you do not prioritise correctly?
The point to my saying all of this is not to preach that you become super frugal and fail to enjoy life with your hard-earned money. It is, however, to highlight the negative consequences of lifestyle inflation which can be subtle initially but become quite severe. Inflating your lifestyle can lead to increased debt, reduced savings, and a delayed retirement. It’s essential to first identify the ways in which you may be inflating your lifestyle like as above, and then take steps to avoid it.
How to avoid Lifestyle Inflation
Avoiding lifestyle inflation can be challenging no doubt, but it is possible with the right strategies, mindset, and financial discipline. If you want to achieve balance, financial security, and independence, here are some of the best strategies to employ;
1. Set financial goals
Setting financial goals is an essential strategy and the first place to start to avoid lifestyle inflation. Financial goals provide you with a clear direction for your money and help you avoid making purchases that don’t align with those goals. To set effective financial goals, start by identifying your long-term goals, such as saving for retirement, buying a house, or paying for your children’s education. Then, break those goals down into smaller, achievable goals that you can work towards on a daily, weekly, or monthly basis.
For example, if your long-term goal is to save for a down payment on a house, your smaller goals could include reducing your monthly expenses, increasing your income, and saving a certain percentage of your income each month. By setting specific goals and breaking them down into manageable steps, you’ll be more likely to achieve them and less likely to be swayed by short-term temptations.
Another benefit of setting financial goals is that it provides a sense of accomplishment and progress. When you achieve a goal, you’ll feel a sense of satisfaction and gain the motivation to keep going. This positive reinforcement can help you stay on track and avoid lifestyle inflation.
2. Create a budget
Creating a budget is a crucial step in avoiding lifestyle inflation. A budget is a plan for your money that outlines your income, expenses, and savings goals. By creating one, you can identify areas where you’re overspending and find ways to cut back. Here are some tips for creating an effective budget:
Track your expenses: To create an accurate budget, you need to know how much you are spending each month. Use a budgeting app, spreadsheet, or good old pen and paper to track your expenses and categorise them into groups such as housing, transportation, food, entertainment, etc. More on how to do this effectively can be seen here.
Identify fixed and variable expenses: Fixed expenses are expenses that don’t change each month, such as rent or mortgage payments. Variable expenses are expenses that can vary from month to month, such as groceries or dining out.
Prioritise your goals: When creating this budget, make sure you prioritise your financial goals. Allocate a certain percentage of your income towards each goal and adjust your spending in other areas accordingly.
Be realistic: About both your expenses and your income. Don’t set unrealistic goals that you can’t achieve, as this would only lead to much frustration and burnout.
Note that creating a budget is an ongoing process that requires regular review and adjustment. Be sure to track your progress and adjust your budget as needed to ensure you’re on track to achieve your financial goals.
3. Avoid lifestyle inflation triggers
Lifestyle inflation is often triggered by external factors such as a raise or new income source, coupled with things like peer pressure and the sheer desire to own and do more things. You need to be hyper aware of your triggers and take deliberate steps to avoid them. Here are some tips for avoiding lifestyle inflation triggers:
Keep your lifestyle in check: One of the best ways to avoid lifestyle inflation triggers is to maintain your current lifestyle, especially in the first 6 months to one year after your income increases. Avoid making significant changes to your lifestyle just yet, such as upgrading to a larger home or buying a luxury car. Over time, and after more truly important financial goals have been sorted, you may choose to wisely upgrade your lifestyle in a gradual fashion.
Be mindful of your spending: When you receive that new money, it’s so tempting to immediately increase your spending. Before making a purchase, take a moment to consider whether it aligns with your values and goals. Will it bring you long-term satisfaction and happiness, or is it a fleeting impulse buy that you’ll regret later? Being mindful of your spending helps prevent you from making impulsive purchases. Take out time to evaluate your financial goals and decide how to best allocate the extra income.
Boost savings and investments: Consider allocating a portion of that extra income towards building your savings, including your emergency fund. Also, select a good investment and work towards building and diversifying your portfolio. This will help you avoid lifestyle inflation and accelerate your progress toward your financial goals.
4. Prioritise experiences over things
Instead of focusing on accumulating material possessions and priding in consumerism, give the priority to gainful experiences. The right experiences can provide lasting memories and enrich your life in ways that material possessions cannot.
Studies have shown that people feel far less regret when they spend on experiences than on items. Plus, experiences often have a lesser negative impact on your wallet than material possessions. Here are some examples of how you can prioritise experiences over things:
Spend quality time with loved ones: Instead of spending good dollars on a luxurious item like a new car, you could plan a road trip with friends or family and have some fun. This can be a much more fulfilling and memorable experience, without the long-term costs associated with buying a luxury car. Another option is to plan a staycation in your own city or town. Visit local museums, parks, and restaurants that you haven’t explored before. This can be a great way to discover new things about your locality and create lasting memories with loved ones.
Attend events and activities: Many towns and cities offer free and low-cost events and activities throughout the year, such as outdoor concerts, art festivals, and community fairs. Attend these events and enjoy the experience without breaking the bank.
Invest in experiences that align with your values: If you value fitness and wellness, invest in experiences that align with those values, such as yoga retreats or hiking trips. You’ll get more enjoyment out of them and avoid spending money on things that don’t truly matter to you.
5. Surround yourself with like-minded people
Finally, surround yourself with people who share your financial values and goals. People who, to different degrees, would help keep you accountable to your plan. This is one secret sauce that is not hammered upon nearly enough.
It’s easier to maintain good financial habits when you’re surrounded by people who practice the same habits. They provide priceless support and encouragement of those habits in you. Here are some tips for surrounding yourself with like-minded people:
Join a financial community: Join a financial community, such as a personal finance forum or online community available to you where you can connect with like-minded people, learn and share tips and good advice. There are good social media pages you can follow and engage.
Attend financial workshops and seminars: Attend financial workshops and seminars in your area to connect with other people who are keen on personal finance matters. If you dig well enough, you’d see what events are available to you.
Build a support network: Build a support network of friends and family who share your financial values and goals. Encourage each other to make good financial decisions and hold each other accountable. You have to be intentional about this and it will pay off well.
Speak with a financial coach: A financial coach is a professional who would help improve your financial literacy by teaching you important money management skills and good financial planning. Such persons are great at helping guide you toward your goals and keeping you on track to achieve what is most important to you. It’s a worthy investment to engage one. You can reach out to one here.
By surrounding yourself with like-minded people, you are far more likely to maintain good financial habits and cut out lifestyle inflation.
In summary, avoiding lifestyle inflation requires a good deal of awareness, discipline, and a clear sense of your financial goals. By setting those goals, creating a budget, avoiding triggers, prioritising experiences, and surrounding yourself with like-minded people, you can be successful at this and achieve long-term financial security. Remember, the key is to be intentional with your spending and make deliberate choices that align with your highest values and priorities.
To Wrap This All Up
Lifestyle inflation is a common problem of upwardly mobile people that can have a detrimental impact on their financial health and overall well-being. By increasing your expenses to match your income, you may find yourself stuck in a cycle of overspending and struggling to make ends meet.
Throughout this article, we explored the reasons why lifestyle inflation occurs, the consequences of falling victim to it, and the best ways to avoid it. By implementing strategies such as setting financial goals, being intentional with your spending, and surrounding yourself with like-minded people, you can maintain your lifestyle without falling victim to lifestyle inflation.
It’s important to know that keeping up with the Joneses is not a sustainable or fulfilling way to live. Instead, focus on living within your means and finding satisfaction in the things that truly matter to you.
The benefits of avoiding lifestyle inflation are clear – greater financial security, reduced stress and anxiety, and a more fulfilling life all around. We encourage you to take action today to avoid lifestyle inflation and begin building a better financial future for yourself and your loved ones. Remember, small changes can make a huge difference over time, so start by making one small change today and watch as it snowballs into a lifetime of desired financial success!
I hope you found this piece to be helpful! Would you like to have a money discussion with me as a financial coach? If yes, contact me right away.