How to Manage Lifestyle Inflation (Best Way)

How to Manage Lifestyle Inflation (Best Way)
How to Manage Lifestyle Inflation (Best Way)

When they have money, they spend it. And when someone has more money, some people tend to spend it more. Imagine a recent college graduate starting a new job and paying $2,100 a month for a cozy apartment. When they get a raise four years later, they might hunt for a better apartment for $2,900 a month.

The new apartment is in a building with greater amenities and is situated in a hipper, more fashionable neighborhood, yet the old one was adequate (good condition, decent location, nice neighbors). They upgraded to a more expensive apartment even though they had a good living space in the first one—not because they had to, just because they could.

Usually, a person’s monthly expenses increase in collaboration with their advancement into a higher-paying job at work. This is often called “lifestyle inflation.” If this occurs to you, it could be a concern since, while you might still be able to cover your expenses, you will have less opportunities to use your increased income to accumulate wealth.

NOTE: 

  • When you earn more money, your monthly expenses rise, a phenomenon known as lifestyle inflation.
  • Spending more money than you make might become problematic since it prevents you from accumulating wealth.
  • When someone feels entitled to spend more money, they frequently do so in order to keep up with the spending patterns of those around them.
  • When your circumstances both personally and professionally change, it could make sense to spend more money.
  • By understanding (and keeping separate from) your necessities and wants, as well as when to save and spend, you may steer clear of the traps brought on by lifestyle inflation.

Why Is There Lifestyle Inflation

Keeping up with the Joneses is a common mindset that contributes to people spending more money when they have more access. People often feel pressured to spend the same amount of money as their friends and coworkers:

Even though your old car still gets you from point A to point B just fine, you could feel pressured to upgrade if you know someone else who drives a Venza.

Even though when you first lived in your ideal home on one side of the city, you could feel compelled to move because so many of your friends now live in different parts of the city.

You’ve always been envious of other people’s vacations, good dining experiences, and attire, and now you have the resources to follow suit.

Remember that the Joneses can be maintaining their look of riches over decades by paying off a significant amount of high-interest debt. They may not be wealthy despite their appearance, and they may not be making wise financial decisions either.

A feeling of entitlement is another aspect that contributes to the inflation of lifestyles. You feel justified in treating yourself to the finer things in life because you’ve worked hard for your money. Although this makes complete sense, overindulging in self-gratification for your efforts might have negative effects on your current and future financial situation.

Another name for lifestyle inflation is “lifestyle creep.”

As time goes on, both your personal and professional circumstances will shift. This implies that you will probably need to spend more money on items like a car, which you had previously avoided completely, or items on which you might cut costs, like your clothing. A certain level of lifestyle inflation is to be expected as your duties to your family and job change.

Thus, there can be instances where it makes sense to increase your spending in particular areas. For example, you might need to hire someone to handle housework or other activities if you have received a promotion at work that requires you to work longer hours or travel more. Alternatively, your family may require you to relocate to a larger house.

If you have the extra money, it might also make sense to spend it on things that will enhance your quality of life. As your job progresses, you might find yourself with less time to tidy the house and mow the grass. 

Paying someone else to do it might make sense even though it’s an additional expenditure, especially if it would free up time for you to engage in a pastime or spend time with loved ones.

Having some leisure time to yourself can boost your productivity at work and support a positive work-life balance.

Creating and adhering to a budget will help you stay away from the dangers that come with lifestyle inflation.

Preventing Inflation in Lifestyle

Even while you might not be able to completely prevent lifestyle inflation, keep in mind that every purchase you make now has an impact on your financial status tomorrow. Furthermore, spending more money now could make it more difficult to break the habit later.

You recently spent all of your retirement savings on those $700 Alexander McQueen heels, so you might feel the urge to replace them eventually. Think about whether you can really afford to spend so much on shoes. If you can, should you even?

Perhaps if your income increases significantly, it’s still possible—and perhaps rather easy—to find yourself living paycheck to paycheck, just as you did when your income was somewhat lower.

Lifestyle inflation leads to excessive spending, which can easily become ingrained in the mindset that the more money you make, the more you waste. Simply to keep up your new, inflated level of living, you purchase more items than you actually need.

Invest or Save?

Suppose if at the age of 25, you indulged in purchasing a better-quality phone or a pair of Alexander McQueen for $700. However, consider if you had used that $700 to invest. 

At age 65, the $700 would be worth $4,583 if you made no more investments and assumed a 5% rate of return (ROR). Even though the shoes are fantastic, which would you prefer—a few years of fantastic shoes or over $5,000 more as you approach retirement?

Desires and Needs

Even though certain purchases are required, it’s wise to distinguish between needs and wants. Making sincere, realistic judgments about whether a prospective purchase is a need or a want will help you avoid excessive lifestyle inflation and make smarter financial decisions.

Setting aside or investing a sizable portion of your rising income is another strategy to prevent overspending as your income rises. For instance, if your monthly income has increased to $1,000, you should save or invest an additional $750. You might replenish your individual retirement account (IRA), add to your emergency fund, or increase your 401(k) contribution. You won’t be able to spend the extra cash on unimportant things if you put it away.

What is Lifestyle Inflation? 

A surge in spending when a person’s income increases is referred to as lifestyle inflation, also known as lifestyle creep. Their responsibilities and expenses increase along with their available income, often dramatically. Therefore, while earning more money, lifestyle inflation may actually leave people in worse financial situations.

How Can Lifestyle Creep Be Avoided?

It might be difficult to avoid the lifestyle creep trap because it usually comes as a surprise, but here are some tips to help you do so once your pay increases.

Compute the numbers: Determine how much more you are actually netting first. The impact of a raise on the bottom line after taxes is frequently not as large as it seems.

Avoid taking any long-term action: Sure, celebrate, but limit it to something ephemeral, like a trip, a piece of jewelry, or a cutting-edge flat screen. Avoid making any immediate large commitments, such as leasing a new apartment or purchasing a car. Wait until you’ve determined your new budget and the initial flush of euphoria has subsided (see above).

Get out from under: If you want to be good to yourself (as you should), how about using the extra funds to pay off some credit card balances or loans? Maybe it’s not as much immediate fun as the aforementioned flat screen, but there’s a lot to be said for clean slates. And with the money you save on interest, you’ll be able to afford to buy a toy that much sooner.

Invest: Continuing the delayed-gratification theme, consider bumping up your 401(k) or IRA contributions—or starting them. You’ll be thankful when you reach those retirement years. Or even sooner: If your raise bumped you into a higher tax bracket, you’ll appreciate the deduction on next year’s tax return.

What Does “Keeping Up With the Joneses” Mean?

The phrase “keeping up with the Joneses” refers to a feeling that you have to spend as much and as conspicuously as your friends, neighbors, work colleagues—or anyone in your social or physical milieu. The implication is that if you don’t, you’ll fall behind in social position and popularity.

Several origins of the expression exist. 

Certainly, it became common after the debut of a comic strip named “Keeping Up With the Joneses,” about a social-climbing family, in The New York Globe in 1913; hugely popular, it was syndicated around the country until 1940.

But there are earlier references to Joneses in the context of social comparisons and conspicuous consumption. Some say the expression originated in reference to two great-aunts of the novelist Edith Wharton, who built spectacular—and in Wharton’s view, spectacularly ugly— mansions in New York City and upstate New York.

Another super-rich Jones family of the late 1800s, based out of Wilmington, North Carolina (with homes in New York City and Newport, Rhode Island) is also cited as the inspiration for the phrase.

Conclusion

While an income boost is generally welcome, you can be broke and in debt earning $200,000 a year or earning $20,000. It all depends on how you spend and save your money. 

As your income grows, putting some of that good fortune to work through savings and investments—and being mindful of the differences between needs and wants—can help you manage lifestyle inflation before it ends up managing you. 

You’ll also have more saved to contribute to charity or help a family member or friend in a tight spot.