Lifestyle Inflation

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.

BREAKING DOWN '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. Disposable Income

    The amount of money that households have available for spending ...
  3. Income Elasticity Of Demand

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

    The income of an individual or group after taking into consideration ...
  5. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise ...
  6. Intertemporal Choice

    An economic term describing how an individual's current decisions ...
Related Articles
  1. Professionals

    6 Benefits of Working Part Time Instead of Full Time

    Examine the various advantages of working full time versus working part time, and learn key factors to consider in making the choice.
  2. 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?
  3. 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.
  4. Savings

    Retirement Savings Plans For Kids

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

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

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

    Saver's Tax Credit: A Retirement Savings Incentive

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

    Retirement Savings Tips For Young People

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

    Increase Your Disposable Income

    Here are four quick and easy ways to up your spending money.
  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.
RELATED FAQS
  1. How does a cost-of-living adjustment (COLA) affect my salary?

    Learn how employers add cost-of-living adjustments to workers' salaries to offset the effects of inflation or aid in a lateral ... Read Answer >>
  2. Are Canadian Pension Plans inflation-protected?

    Learn about the Canada Pension Plan and how it adjusts its contributions and benefits each year for changes in inflation ... Read Answer >>
  3. When is the best time to invest in inflation-protected securities?

    Learn how to determine when to consider buying an inflation-protected security to enhance the returns of your investment ... Read Answer >>
  4. Should I include inflation-protected securities in my 401(k)?

    Learn how to protect your 401(k) from the adverse effects of inflation by adding inflation-protected securities to your portfolio. Read Answer >>
  5. Is Social Security inflation-protected?

    Understand how U.S. Social Security benefits are indexed to changes in prices to adjust for changes in the cost of living ... Read Answer >>
  6. Marginal propensity to Consume (MPC) Vs. Save (MPS)

    Learn the significant roles that the marginal propensity to consume and the marginal propensity to save play in Keynesian ... Read Answer >>
Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center