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. Lifestyle Creep

    A situation where people's lifestyle or standard of living improves ...
  2. Personal Finance

    Personal finance: all financial decisions and activities of an ...
  3. Consumption Smoothing

    The ways in which people try to optimize their lifetime standard ...
  4. Inflation Protected

    The types of investments that provide protection against inflation ...
  5. Headline Inflation

    The raw inflation figure as reported through the Consumer Price ...
  6. Pay Yourself First

    A phrase commonly used in personal finance and retirement planning ...
Related Articles
  1. Retirement

    Will Your Savings Support Your Retirement Lifestyle?

    Protect your retirement savings by planning for lifestyle inflation and longevity risk.
  2. Retirement

    How to Change Your Lifestyle to Retire Early

    You will likely have to change your lifestyle to retire early, but it's definitely doable.
  3. Managing Wealth

    Savings Tips for Pro Athletes and Celebrities

    Saving while you're making money to cover the leaner times is important, no matter who you are.
  4. Retirement

    How Much Money Do You Need to Retire at 56?

    Who wouldn't want to retire early and enjoy the good life? The question is, "How much will it cost?" Here's a quick and dirty way to get an answer.
  5. Financial Advisor

    Two Roads: Debt or Financial Independence?

    A higher income won't make you richer – unless you learn to live on less.
  6. Personal Finance

    Financial Planning: It's About More Than Money

    Financial planning isn't just about the money. Find out where else to focus on.
  7. Personal Finance

    Got a Raise? Here's How to Avoid Lifestyle Creep

    Living above your means is a recipe for financial trouble. Here's how to avoid lifestyle creep when you come suddenly into more money.
  8. Investing

    How Inflation Affects Your Cash Savings

    Prices tend to rise over time and this inflation can cut into the value of your savings. Here are some ways you can manage the situation.
  9. Retirement

    Retiring: Is $1 Million Enough?

    Find out why this magic number has lost some of its lustre as a retirement savings target.
RELATED FAQS
  1. How do I retire?

    When considering how to plan for retirement, firstly think about the age at which you want to retire and the lifestyle you ... Read Answer >>
Hot Definitions
  1. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an ...
  2. Salvage Value

    The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
  3. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  4. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  5. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  6. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
Trading Center