Lifestyle Inflation: How to Recognize and Avoid It

by Melissa Horton, Expert, Editor Fea Money Financial Literacy School. Photo Credit, Unsplash

Lifestyle inflation is best described as a vicious but often unrecognized cycle of financial or spending increases. When income increases (even by a small amount), spending—not saving—increases at a similar rate. Each time a promotion, raise, or job change occurs, many people fall victim to the same cycle of lifestyle inflation. This may come in the form of spending more on certain everyday items like groceries or self-care. For others, it means turning luxury items into everyday necessities and blurring the lines between needs and wants. 

Although earning more is something to celebrate, lifestyle inflation can be a thief of financial stability and wellness. Instead of using that extra money toward paying down debt, saving more, or investing for the long term, money is put toward other, fleeting things. 

The first step toward fighting off lifestyle inflation is to recognize that it’s a natural occurrence. We are bombarded with marketing and ads at every turn, both in-person and online. It can be challenging to ignore the barrage of ads vying for our attention and hard-earned money. However, focusing on a few foundational financial practices can minimize the potential for a damaging level of lifestyle inflation. 

Prioritize Budgeting 

Regardless of how much you make each month, budgeting is a financial planning staple. Taking the time and effort to calculate what money is coming in versus what must go out lays the groundwork for understanding your financial life on a deeper level. If that calculation results in a surplus of cash each month, particularly after an increase in income, you may be tempted to throw your budget out the window. You know you’re earning enough to cover your expenses and then some, so budgeting may feel like an unnecessary, tedious task. 

Unfortunately, this could not be further from the truth. Even when you have a surplus in your budget, it’s crucial to monitor your money continually, as this can help prevent  lifestyle inflation quickly. If you see that you’re spending more on groceries in recent months, dining out, shopping, travel, or entertainment, lifestyle inflation may be the culprit. It’s not wrong to spend more on these items when you make more, but keeping a budget and monitoring it monthly can help expose overspending before it becomes a long-term problem.

Clearly Define Needs Versus Wants

Another indicator that lifestyle inflation is taking hold of your financial life is a fuzzy line separating your “needs” from your “wants.” We all have basic living expenses to cover each month—rent or mortgage, utilities, a phone bill, food, and debts, to name a few. When living on a tight budget, nearly all of one’s income may go toward taking care of these necessities. There isn’t much thought given to extras like a weekend getaway or new outfits. However, it’s common to add these items to the “needs” category in your budget when income increases. 

To ensure you aren’t going overboard with these luxury purchases, try to take a moment to determine what is genuinely a need versus a desire. If you can live without it, it likely falls into the “wants” bucket. You don’t have to keep these items out of your budget completely—you do, however, want to be sure you’re allocating a reasonable amount to these purchases to avoid lifestyle inflation. 

Bank Your Surplus

Some of the most successful savers automate their financial lives every step of the way. You can use this simple but powerful tool to avoid lifestyle inflation anytime income increases. Calculate how much extra you can expect from your bi-weekly or monthly wages and plan to bank that surplus. This could mean bumping up an automatic savings transfer each pay period or month or starting a new one. If you have debt, consider using some of your new surpluses to speed up the repayment timeline. One or more of these strategies can put your extra earnings to better use than if you were to randomly splurge.

Don’t Compare Yourself to Your Peers

Lifestyle inflation can be hard to avoid if you’re constantly comparing your financial life to others. Comparison to a friend or co-worker’s recent major purchase, like a lavish vacation or a new luxury vehicle, subconsciously fuels spending on things that may not logically or comfortably fit into your budget. Unless you ask, you can’t know for sure what someone else’s checking or savings account looks like. Maybe they saved for several years to afford that big purchase. Maybe they are deep in debt because of it. 

Always check in with yourself before spending big on something. Ask yourself if it fits within your budget or if that money could be better used elsewhere. Don’t let comparison be the pitfall to your financial stability, no matter who else is spending big. 

Reevaluate Periodically

Finally, be sure to review your budget and financial goals periodically. Lifestyle inflation sneaks up on the best of us, and the only way to combat it over the long term is to evaluate your income and spending from time to time. Most experts suggest checking in with your overall finances once per year, adjusting your budget as needed to fit your short- and long-term goals. Additionally, sitting down to review the numbers anytime an increase in income takes place is essential. 

Final Thoughts

Recognizing and then avoiding lifestyle inflation can be necessary to achieve sustainable financial stability and success. Get up close and personal with your budget, and stick with it no matter how much you’re bringing in. Over time, consider your “needs” and “wants” in the process, and consider automating some additional savings when your income allows. Steering clear of comparison also plays a tremendous role in keeping lifestyle inflation to a minimum. Following these steps consistently can help put you on a financially healthy path for the foreseeable future.

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