How to Manage Lifestyle Inflation

People spend money when they have it. And certain people spend more money when they have more. Consider a college graduate with a new career who rents a comfortable apartment for $750 a month. They may look for a better apartment for $1,250 per month when their salary increases a few years later.

The old apartment was adequate (good condition, great location, nice neighbors) but the new one is located in a more exclusive neighborhood. Even with a suitable living arrangement in the original apartment, they traded up to a more expensive one—not out of need, but because they could.

When a person advances into a more profitable position at work, their monthly expenses typically follow suit. This is commonly referred to as lifestyle inflation. If this happens to you, it can become a problem because you may still be able to pay your bills, but your ability to build wealth becomes limited.

Key Takeaways

  • Lifestyle inflation occurs when your monthly expenses increase as you earn more money.
  • Spending more money even though you earn more can become a problem as your ability to build wealth becomes limited.
  • People often spend more money to keep up with the spending habits of those around them and when they feel entitled to do so.
  • Spending more money may make sense when your personal and professional situations change.
  • You can avoid the pitfalls associated with lifestyle inflation by knowing when to save/spend and by recognizing (and separating) your needs and wants.

Why Lifestyle Inflation Happens

One of the reasons why people spend more money when they have more available is when they're keeping-up-with-the-Joneses mentality. It’s not uncommon for people to feel they have to match the spending habits of their friends and colleagues:

  • If others drive a BMW, you may feel as though you need to buy one as well, even if your old set of wheels gets you from Point A to Point B just fine.
  • Your house on one side of the city may have been your dream home when you moved in, but you may suddenly feel the need to move with so many of your associates living on the other side.
  • Lifestyle inflation can also creep into other areas beyond just what you drive and where you live. You may spend more money than you need to (or should) on vacations, dining out, entertainment, boats, private school tuition, and clothing just to keep up with the Joneses.

Keep in mind that the Joneses may be paying off a lot of high-interest debt over a period of decades to maintain their appearance of wealth. Just because they look rich doesn’t mean they are, and that doesn’t mean they are making financially sound decisions.

Another contributing factor to lifestyle inflation is a sense of entitlement. You’ve worked hard for your money, so you feel justified in splurging and treating yourself to better things. While this isn't always a bad thing, rewarding yourself too much for your hard work can be detrimental to your financial health now and in the future.

Lifestyle inflation may also be referred to as lifestyle creep.

When Spending More Makes Sense

There may be times when increasing your spending in certain areas makes sense. For instance, you may need to upgrade your wardrobe in order to dress appropriately following a recent promotion at work. Or you may need to move into a bigger home after to accommodate your growing family so the grown-ups can get some sleep.

Your situation will change over time—both professionally and personally. This means you will likely have to spend more money on things you previously avoided altogether, like a car, or things you could skimp on, like your wardrobe. You can expect a certain amount of lifestyle inflation as your work and family obligations evolve.

Spending a little extra to improve your quality of life may also make sense, as long as you can afford it. So you may not have time to mow the lawn and clean the house as you advance in your career. Even though it’s an added expense, spending more money and paying someone else to do it may make sense, so you can free up some time to spend with family, friends, or doing a hobby you enjoy.

Being able to enjoy a bit of free time helps promote a healthy work-life balance and can make you more productive at work.

Making a budget and sticking to it can help you avoid succumbing to the risks associated with lifestyle inflation.

Avoiding Lifestyle Inflation

While some level of lifestyle inflation may be unavoidable, remember that every spending decision you make today affects your financial situation tomorrow. And increasing your spending now may make it harder to curb the habit in the future. Those $800 Jimmy Choo heels you just bought come straight out of your retirement nest egg and when they wear out, you may feel the need to replace them. Consider asking yourself whether you afford to spend that much on shoes. Even if you can, should you?

Although you may receive a substantial pay increase, it’s possible—and even quite easy—to end up living paycheck to paycheck, the same way you did when you made much less money.

The increased spending that results from lifestyle inflation can quickly become a habit—the more you earn, the more you burn. You buy more things than you need just to maintain your new (inflated) standard of living.

Spend or Save?

Assume you splurged and bought that $800 pair of Jimmy Choos when you were 25 years old. But imagine investing that $800 instead. That $800 would be worth $5,632 when you turn 65, assuming no additional investment and a 5% rate of return (RoR). Even though the shoes are awesome, would you rather have great shoes for a couple of years or almost $6,000 extra as you enter retirement?

Needs and Wants

While some purchases are necessary, it always pays to separate needs from wants. Keeping needs and wants in mind—and making realistic, honest assessments about whether a potential purchase is a need or a want—can help you make better financial decisions and avoid excessive lifestyle inflation.

Another way to avoid excess spending as you make more money is to save or invest a healthy percentage of your increased wages. For example, if you now earn $1,000 extra each month, plan on saving or investing $750—an extra contribution to your 401(k), adding money to your emergency fund, or funding your individual retirement account (IRA). If you stash the extra money away, you won’t be able to spend it on things that don’t really matter.

The Bottom Line

While an income boost is generally welcome, you can be just as broke and in debt whether you’re earning $20,000 or $200,000 a year. It all depends on how you spend and save your money. Putting some of that good fortune to work through savings and investments, and being mindful of the differences between needs and wants can help you manage lifestyle inflation before it ends up managing you.

Article Sources

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  1. Forbes. "The True Cost Of Lifestyle Inflation." Accessed Dec. 24, 2021.

  2. Experian. "What Is Lifestyle Creep and How Can You Prevent It?" Accessed Dec. 24, 2021.