5 Ways To Combat Lifestyle Inflation

Have you ever received an increase in income only to realize that your finances didn’t improve afterward? Well, you may have fallen victim to what is called “Lifestyle Inflation” or “Lifestyle Creep.” Lifestyle inflation happens when an individual increases their spending due to their increase in income. If you are like many of us, you have experienced lifestyle inflation at least once in your lifetime. For example, the urge to purchase a new car, even though your present car is perfectly fine, or the one time that you may have splurged at a restaurant. And sure, some lifestyle inflation is good for the soul. I mean, the whole point of us working hard and earning more is to help improve our lives, correct? The main issue with lifestyle creep isn’t about the increase in resources used to help improve oneself; it’s the slow, sometimes easily forgotten, and unnecessary spending that doesn’t add value to our lives. 

Let’s say you got a promotion, and your annual income increases by 50%. But instead of investing or saving the added income for a rainy day, you decided to purchase a car when you already have a car that is still in reasonable condition. Before you know it, you are stuck with an added monthly expense that accounts for at least 30% or more of your increased income. You’re now left in a state of bewilderment because the joy of the promotion that resulted in the income increase has quickly faded. 

Luckily, there are some ways that we can avoid lifestyle inflation: 

Develop a savings method and stick to it: 

By developing a savings method, it will be less confusing to decide how much money you should be saving since your income increased. For example: If you were always saving 30% of your salary before your increased income, then continue doing so; the savings amount will still increase since the 30% will be based on the new income. 

Set Short Term and Long Term Financial Goals: 

As you may know, when you set a goal, be it short or long term, you are more guided and motivated to achieve them. You may want to purchase your first house/ condo, or you may have retirement goals. Write it down, stick it someplace where you can’t ignore seeing it. This will help motivate you to keep up with all the habits necessary to achieve that goal and develop the discipline to avoid lifestyle creeps. 

Hold yourself accountable: 

Self-Accountability helps you develop self-control and awareness. Being accountable is also acknowledging the consequences of your financial decisions. 

Create a Budget: 

To ensure that lifestyle inflation does not get out of hand and prohibit you from getting ahead, a budget might be precisely what the financial doctor prescribed. With a budget, you learn to distinguish needs from wants, eliminate waste, and prioritize your spending on what’s most important to you.  

The Bottom Line: 

Lifestyle inflation can quickly impact your finances in a negative way. The booby trap of short term gratification that presents no value can slow down your plan to obtaining your financial goals and limit your ability to save or invest. The best way to limit lifestyle creep is to be proactive. Don’t wait until you earn more to decide what to do with it. Create an ongoing plan that weighs all financial decisions against your financial goals.