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 $1,100 a month. They may look for a better apartment for $1,900 per month when their salary increases a four years later.

The old apartment was adequate (good condition, decent location, nice neighbors) but the new one is in a building with more amenities located in a cooler, hipper 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 bettter-paying 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 turn your higher salary into a way 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 because it limits your ability to build wealth.
  • 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: the good old 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 a better car 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 with so many of your associates living in other neighborhoods, you may suddenly feel the need to move.
  • You've always envied other people's clothes, furnishings, vacations, patronage of fine restaurants and cultural events—and now you have the means to do the same.

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 the better things in life. While this is totally understandable, 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

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.

So, there may be times when increasing your spending in certain areas makes sense. For instance, if a recent promotion at work means longer hours or more travel, you naturally may need to hire someone to do housekeeping or chores. Or you may need to move into a bigger home to accommodate your growing family.

Spending a little extra to improve your quality of life may also make sense, as long as you can afford it. 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 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 (or better-grade mobile phone) when you were 25 years old. But imagine you'd invested 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.

What is lifestyle inflation?

Lifestyle inflation, aka lifestyle creep, refers to an increase in spending when an individual's income rises. As their available funds go up, so do their expenses and obligations—sometimes disproportionately. As a result, lifestyle inflation can cause people to actually be in worse financial shape even though they're earning more money.

How can I stop lifestyle creep?

Sidestepping the lifestyle-creep trap isn't easy—it tends to sneak up on you—but here are some strategies to avoid it after you get that income bump.
Do the math: First, calculate how much more you're really netting. After taxes, the bottom-line effect of a raise is often less significant than it appears.

Don't do anything long-term: For sure, celebrate—but make it a finite thing like a vacation, a piece of jewelry, or a state-of-the-art flat screen. Don't jump into any major commitments, like buying a car or leasing a new apartment, right off. Wait until the first rush of euphoria fades, and you've figured your new budget (see above).

Get out from under: If you want to be good to yourself (as you should), how about using the extra funds to pay off some credit card balances or loans? Maybe it's not as much immediate fun as the aforesaid flat screen, but there's a lot to be said for clean slates. And with the money you save on interest, you'll be able to afford to buy a toy that much sooner.

Invest: Continuing the delayed-gratification theme, consider bumping up your 401(k) or IRA contributions—or starting them. You'll be thankful when you reach those retirement years. Or even sooner: If your raise bumped you into a higher tax bracket, you'll appreciate the deduction on next year's tax return.

What does "keeping up with the Joneses" mean?

The phrase "keeping up with the Joneses" refers to a feeling that you have to spend as much and as conspicuously as your friends, neighbors, work colleagues—or anyone in one's social or physical milieu. The implication is that if you don't, you'll fall behind in social position and popularity.
Several origins of the expression exist. Certainly, it became common after the debut of a comic strip named "Keeping Up with the Joneses," about a social-climbing family, in The New York Globe in 1913; hugely popular, it was syndicated around the country until 1940.

But there are earlier references to Joneses in the context of social comparisons and conspicuous consumption. Some say the expression originated in reference to two great-aunts of the novelist Edith Wharton, who built spectacular—and in Wharton's view, spectacularly ugly— mansions in New York City and upstate New York. Another super-rich Jones family of the late 1800s, based out of Wilmington, North Carolina (with homes in New York City and Newport, Rhode Island) is also cited as the inspiration for the phrase.

The Bottom Line

While an income boost is generally welcome, you can be broke and in debt earning $200,000 a year or earning $20,000. It all depends on how you spend and save your money. As your income grows, 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. You'll also have more saved to contribute to charity or help a family member or friend in a tight spot.

Article Sources
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  1. Forbes. "The True Cost Of Lifestyle Inflation."

  2. Experian. "What Is Lifestyle Creep and How Can You Prevent It?"

  3. The New York Times. "On Language; Up the Down Ladder."

  4. Hermione Lee. "Edith Wharton," Pages 22-23. Pimlico, 2013.

  5. Star-News. "Keeping up with the Joneses."