What is 'Lifestyle Inflation'

Lifestyle inflation refers to increasing one's spending when 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.

Strategies for Avoiding Lifestyle Inflation

  • Calculate real changes to budget: After taxes and expenses, the net effect of a raise is often less significant than you first think. Take the time to calculate the real change to your budget and determine how that extra money is going to affect you.
  • Value experiences over things: If you start making more money, instead of going for a new car, house, or expensive wardrobe additions, consider investing in experiences. Going on a vacation or signing up for a class can create memories that give you a lasting satisfaction.

  • Make gradual changes: An expensive car might require a pricier mechanic, and a big house requires more upkeep. Don’t go “from zero to 60” in the first few weeks, following your change in income. Celebrate modestly and pat yourself on the back.

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