5 Things To Know About Lifestyle Inflation

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Written by Dana Sanchez
lifestyle inflation
Image by Morning Brew on Unsplash

Lifestyle inflation, also known as lifestyle creep, is the never-ending pursuit of more stuff. It can happen when your income increases due to a raise or windfall, and your spending increases along with your income.

For example, you got a raise and bought a new car or a bigger house, eating up the entire raise — or more — by the new bills you now have to pay.

Left unchecked, lifestyle inflation can turn your hard work and higher pay into higher credit card bills and more “stuff” you may have been able to without. This is akin to running in place and could make it almost impossible to get ahead, regardless of how much money you bring in. It can also create problems if you lose your job or need to cut back on work.

Anyone can be affected by lifestyle inflation

Close to 60 percent of people in the U.S. have less than $1,000 in their savings, according to a 2017 GoBankingRates study. Even families earning $500,000 a year can still end up with little to no savings, according to personal money-management expert and radio personality Dave Ramsey. Lifestyle inflation could be blamed for lack of savings.

Make paying off debt a priority

Before letting your spending increase with your income, first make extra payments toward debt, says career advisor The Ladders. You could do this by increasing your automated payments so the money comes out of your checking account before you have a chance to spend it on other things.

Some debt may not need to be paid off early and aggressively, such as a mortgage loan with a low interest rate and tax-deductible interest. This type of debt is “good” and it may make sense to grow your investments before focusing on becoming debt-free.

Automate your savings

It’s really easy to spend cash in your bank account. If you already have an emergency fund, consider automatically putting extra cash in a brokerage account for investment.

If it’s not set up automatically, there’s the temptation to spend now rather than invest for the future. People regret not having saved more. “Few look back and wish they took more vacations in business class,” writes Kristin McKenna, a certified financial planner and Forbes contributor.

Write down long-term financial goals

Make a written list of what you want to accomplish before you make lifestyle improvements, Dave Ramsey suggests. For example, you may decide put off buying a newer car or renting a nicer apartment until your student loan balance goes below $10,000 or you’ve paid off all your credit cards. You could choose to increase your retirement savings until you’re contributing 15 percent of your income to your 401(k) or maxing out your IRA.

Once the goals are written down, stick to them and use extra funds to achieve them rather than allowing lifestyle creep to happen. It’s almost like pretending you didn’t get a raise and maintaining the same standard of living you had before, Ramsey said.

When is lifestyle inflation OK?

No one wants to live like a college student forever, even if you love ramen or instant mac and cheese.

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If you’re still living with your parents, it may be time to put some of your hard-earned cash towards lifestyle improvement such as your own home, The Ladder suggests. “The most important thing is making sure you aren’t just buying stuff that doesn’t make you happy in an effort to keep up with the Joneses.”

The best way to make sure you’re improving your lifestyle sustainably is to go slow. Rather than blowing your bonus on one or two big purchases, take your time.

If you make it your mission, you’ll always be working toward fulfilling important financial goals before you spend money on improving your lifestyle with non-essentials.