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June 30, 2020

What is lifestyle inflation—and how to avoid it

Do you find yourself worried about your spending constantly, even if by all accounts, you earn a decent living? You might have fallen into the dangerous habit of lifestyle inflation. Lifestyle inflation, or lifestyle creep, is the increase in spending and expenses that happens as you advance in your career and increase your income. Lifestyle inflation happens when you start spending money not because you have to, but because you want to.

Do you find yourself splurging because you deserve it after working so hard? Or justifying a vacation or going out every weekend because your friends are doing it, too? Somehow always have a large credit card bill to pay off? Or, thinking back to the last time you got a raise or unexpected income, do you remember what you did with the extra money?

Lifestyle inflation happens when savings are an afterthought, not a priority. While it is always good to save what you can, the biggest impact comes from regular, consistent savings that are high enough to support your future self. Aim for a 20% savings rate by cutting down your current expenses. Every time you get a raise or promotion, increase that savings rate by a couple of percentage points.

Assuming a 5% rate of return. Picture from Motleyfool.com

If you feel slightly panicked at your savings rate or are always promising yourself you’ll save more with the next pay raise, or the next bonus payout at work, you might need to take an in-depth look at your finances. There are ways to recognize lifestyle inflation and combat its effects on your finances.

Reversing lifestyle inflation

Attack the biggest expenses: Question everything, including the assumption that more is always better. We live in a consumption-driven culture, but a raise or promotion does not always need to be accompanied by a step up in the car you drive or the house you live in. Most people spend the bulk of their income on housing, transportation, and food. Think about ways that you might have succumbed to lifestyle inflation in the past in these three areas. Are there ways you can make a major impact on your spending by cutting down in these three categories? Do the math: a smaller apartment closer to your workplace may allow you to save on car payments or car insurance. Negotiating with your employer to work from home three days a week may enable you to buy a house farther away, but for less money.

Don’t fall for peer pressure. If you see friends or peers taking expensive vacations or constantly upgrading their lifestyle, you can be happy for them while also recognizing that this is not something you want for yourself.

Manage recurring costs: Companies across many different industries have discovered how lucrative it is to offer their product or service as a subscription. For them, a subscription represents long-term, stable income. For the consumer, however, subscriptions can be an important factor in lifestyle inflation. To majorly cut down your monthly spend, go through your bank accounts for the past few months (a year would be even better) and write down all recurring expenses. You might be surprised to find that you are paying for services and products you no longer love or use.

This is also a good opportunity to negotiate the bills you are paying or move to different providers who offer better deals. A half hour phone call to your internet or phone plan provider can save you hundreds of dollars a year. Set a reminder on your calendar to do this exercise annually—as soon as you see the rewards of negotiating lower payments, you’ll actually look forward to this every year.

Spend strategically:  Depending on where you are in your financial journey, you may need to create a budget (for more information on coming up with a budget system that works for you, here’s an in-depth article). Having a budget will give you the freedom of knowing exactly what to spend, and when. For example, if you haven’t budgeted enough to order take-out every night this week, you’ll simply have to spend some time on the weekend to meal-prep. Budgeting allows you to spend money on your priorities while eliminating the rest.

This may take some time to get exactly right, but you have to start with the question: what gives me the most joy? What is a priority for me? For example, if you absolutely need to have the latest cell phone, you might need to save an extra $50 a month. But you notice you spend around $80 every month on a lifestyle subscription box that doesn’t really excite you the same way. That’s an easy decision to make, isn’t it? Decide on one category that would bring the most value to you if you splurged on it, and ruthlessly cut back on every other form of lifestyle creep in your life.

Automate your savings: After you’ve taken the steps above, you can make sure that you don’t fall into the trap of lifestyle inflation again by saving a percentage of your income automatically. Many employers can send your regular paycheck to multiple accounts designated by a percentage set by you. For example, you could work with payroll or HR at your organization to send 20% of your take home pay directly to a savings account every pay period. The principle of “out of sight, out of mind” applies here—as you repeatedly see a smaller number deposited into your checking account, you’ll learn to budget within the confines of that dollar figure.

There is no denying that some expenses will increase as you advance through life. Marriage, children, and taking care of loved ones can be a part of your financial journey. However, it does help to periodically reassess and evaluate if everything you’re paying for brings value to your life. Eliminating lifestyle creep is a crucial part of the equation when it comes to building sustainable, generational wealth. Earning more money and increasing your income can help you get ahead financially, but only if you utilize those earnings to build wealth.

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