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What Is Lifestyle Inflation?

Lifestyle inflation is when you spend more money as you earn more. It happens when you get a raise or a higher-paying job, and then you start spending more on things like clothes, gadgets, or eating out.

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Example

Meet Gal, a college student who worked part-time jobs to get by. Gal lived with roommates and ate cheap food like sandwiches and noodles.

After college, Gal got a job at a bank in the city. Gal moved to a solo apartment, which cost more. Plus, Gal got a pet and joined an expensive gym. With more free time, Gal started eating at fancy restaurants.

Even though Gal earned more, spending went up too. This is lifestyle inflation. To stop it, Gal should save some money each month in a savings account and a retirement fund.

Key Takeaways

• Lifestyle inflation happens when someone makes more money and starts spending more too.

• Things like graduating from college, getting a promotion, or earning more can make this happen.

• Sometimes people think buying stuff will make them happy because of lifestyle inflation.

• To avoid lifestyle inflation, it's good to focus on being financially independent and enjoying experiences rather than buying lots of things.

There's nothing necessarily bad about improving your lifestyle with more money. The problem arises when you forget to increase your savings and investments along with your spending. If you only focus on spending more, you might still struggle financially and find it hard to save for emergencies or the future.

To check if you're experiencing lifestyle inflation, look at how much of your income goes toward things you want, things you need, and savings. If you're earning more but only spending more on wants and needs, and finding it tough to pay bills or relying on credit cards, you might be dealing with lifestyle inflation.

In the end, lifestyle inflation can eat up all the extra money you earn, making it tough to save or invest. If you're concerned about it, being more careful with your money choices can help. Try making small changes to reduce spending, focus on enjoying experiences rather than buying stuff, and build up an emergency fund. Having a comfortable savings and investment plan can make your upgraded lifestyle even more enjoyable in the long run.

Strategies for Avoiding Lifestyle Inflation

Lifestyle inflation causes many people to live paycheck to paycheck, struggle to pay their bills, make the minimum payments on their credit cards, and lack the cash resources to fall back on when an unforeseen setback like a medical bill or job loss occurs.

People tend to increase their spending when their income increases. This may be because they believe that the additional goods and services they can now buy will make them happier. However, what can happen instead is a feeling they'll never get ahead. Combatting this requires increasing savings instead of spending.

It's possible to avoid lifestyle inflation by consciously establishing spending and saving amounts. Setting up an automated savings plan can be a good way to ensure you meet your savings goals and that spending is capped. By avoiding lifestyle inflation, you can achieve financial independence at a younger age, have the financial flexibility to choose a dream job over a higher-paying option, and even retire early. Below are some strategies you can use to achieve more financial independence and avoid lifestyle creep.

Calculate Real Changes to Budget

After taxes and expenses, the net effect of a raise is often less significant than it appears. Take the time to calculate the real change to your budget and determine how that extra money is going to impact you.

Plan for Mindful Spending

Instead of indulging your whims as they arise, set a budget that allows you to spend while also saving for the future.

Build an Emergency Fund

Before you start spending your additional income, it's wise to build yourself a financial buffer for when things inevitably crop up. An emergency fund with three to six months of expenses can provide you the cash to cover emergencies without needing to resort to credit.

Choose Experiences Over Things

If you start making more money, consider investing in experiences instead of buying a new car, house, or wardrobe. Activities such as going on a vacation or signing up for an educational class can create memories that give you lasting satisfaction, and they can be shared with friends and family, too.

Make Gradual Changes

An expensive car might require a pricier mechanic, and a big house requires more upkeep. Huge changes to your lifestyle may come with additional hidden costs. Avoid them by celebrating modestly instead; you still get to mark the milestone while keeping your sights set on your long-term goals.