Lifestyle Inflation

AAA

DEFINITION of 'Lifestyle Inflation'

Increasing your spending when your income goes up. Lifestyle inflation tends to continue each time someone gets a raise, making it perpetually 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 the rat race of working just to pay the bills.

INVESTOPEDIA EXPLAINS 'Lifestyle Inflation'


Lifestyle inflation typically occurs when one goes from being a student to a full-time employee. Despite getting by on very little money as a student and skimping on everything from rent to groceries to nights on the town, once that first big paycheck arrives, things that were once luxuries become “necessities”, and spending increases significantly. Sharing a two-bedroom apartment with three other roommates to keep housing and utility expenses down suddenly seems unacceptable, and you go out and lease a one-bedroom apartment in which you will live alone. Riding a bicycle is no longer seen as a fast and convenient alternative to walking or taking the bus; instead, you need a $20,000 car. Lifestyle inflation causes us to live paycheck to paycheck, make the minimum payments on our credit cards, and not have any cash to fall back on when an unforeseen setback like a medical bill or job loss arises.
 
People tend to increase their spending each time their income increases, because they believe that the additional goods and services they are purchasing will make them happier. Often those purchases don’t make them happier, and a better option would be to work toward financial independence by saving more.
 
People can avoid lifestyle inflation by consciously establishing spending and saving amounts. An automated savings plan can be a good way to ensure that savings goals are met and spending is capped. Avoiding lifestyle inflation can mean achieving financial independence at a younger age, having the financial flexibility to choose a dream job over a higher-paying option, and retiring early.
RELATED TERMS
  1. Marginal Propensity To Consume ...

    A component of Keynesian theory, MPC represents the proportion ...
  2. Consumption Function

    The consumption function is a mathematical formula laid out by ...
  3. Disposable Income

    The amount of money that households have available for spending ...
  4. Intertemporal Choice

    An economic term describing how an individual's current decisions ...
  5. Income Elasticity Of Demand

    A measure of the relationship between a change in the quantity ...
  6. Real Income

    The income of an individual or group after taking into consideration ...
RELATED FAQS
  1. What impact does inflation have on the time value of money?

    The impact that inflation has on the time value of money is that inflation decreases the value of a dollar over time. The ... Read Full Answer >>
  2. What are some of the risks of holding liquid assets?

    Liquid assets, such as cash or highly marketable securities, tend to offer lower returns than illiquid assets. This leaves ... Read Full Answer >>
  3. What impact does disposable income have on the stock market?

    In theory, the impact that disposable income has on the stock market is that a widespread increase in disposable income leads ... Read Full Answer >>
  4. What does it signify if there is a large discrepancy between a nation's real and ...

    A large discrepancy between a nation's real and nominal GDP signifies inflationary or deflationary forces in the economy. ... Read Full Answer >>
  5. How does the performance of the stock market affect individual businesses?

    The stock market affects individual businesses by influencing consumer spending and providing the chance for stronger returns ... Read Full Answer >>
  6. How do interest rate changes affect price elasticity in consumer discretionary goods?

    It's very difficult to estimate the interest elasticity of saving and spending, which is how the tendency to consume or save ... Read Full Answer >>
Related Articles
  1. Retirement

    Tips On How To Use IRAs To Boost Retirement Savings

    According to the Trustees of the Social Security Fund, the fund will be depleted by 2037. Are you ready?
  2. Retirement

    How To Start Saving For Retirement

    If you establish these money-saving habits and patiently allow your wealth to build, you will be taking some huge steps forward in making your financial future more secure.
  3. Savings

    Retirement Savings Plans For Kids

    It's never too early to save for the future - learn how your children can get started.
  4. Savings

    6 Retirement Savings Tips For 45- To 54-Year-Olds

    Now is the time to kick savings into high gear. Find out how.
  5. Savings

    Saver's Tax Credit: A Retirement Savings Incentive

    Here's another reason to put money toward your retirement nest egg.
  6. Savings

    Retirement Savings Tips For Young People

    Learn how to avoid the bad habits that keep the average young adult from saving.
  7. Options & Futures

    Increase Your Disposable Income

    Here are four quick and easy ways to up your spending money.
  8. Options & Futures

    401(k) Debit Cards: Taking A Swipe At Your Retirement Savings

    This is just another more convenient way to borrow from your plan. But at what cost?
  9. Retirement

    Thrift Savings Plan Helps Federal Workers Retire

    The TSP is key component of retirement savings for U.S. government workers and members of uniformed services.
  10. Budgeting

    Downshift To Simplify Your Life

    Learn how to ditch the rat race with voluntary simple living.

You May Also Like

Hot Definitions
  1. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  2. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  3. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  4. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  5. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center