How Lifestyle Inflation Hurts Your Finances

Have you ever spent more money than you usually do after getting a raise or a bonus? If you have, then you should already be quite familiar with the concept of lifestyle inflation. 

A simple way to explain this is when your personal or household spending increases as your income level rises. While it is understandable to want to spend the money you worked so hard to earn, knowing when to pull the brakes on your spending to keep your finances healthy.

What is lifestyle inflation?

In a nutshell, when your cost of living increases along with your income. A boost to your income can come from any variety of sources. You could have gotten a raise or a promotion, a new job, or maybe some extra earnings from a side gig. In fact, one of the largest leaps in lifestyle inflation is when a student graduates from college and moves on to earning a full paycheck at their first job.

This financial trap can be very easy to fall into. After all, it is not easy to keep the urge to spend in check once you get a bigger than usual payout.

It is only natural to want to increase your standard of living. However, extras like a mortgage, nicer clothes, or just eating out more can quickly add up if you are not careful.

Why lifestyle inflation is a red flag

Building personal wealth is a slow and steady process. It generally involves saving and investing a substantial chunk of your earnings. This becomes harder if there is little to no gap between your earnings and spending.

It is not that you can’t spend on yourself to upgrade your standard of living once you get some extra cash. Sometimes, such spending is necessary to improve your quality of life and keep you motivated and happy. Big events, such as getting married, will come with major extra spending.

Issues begin to arise once your lifestyle spending starts to take such a huge chunk from your income that you can’t afford to increase your savings when your earnings increase.

When that happens, your spending habits might begin to impede on your ability to save sufficient funds for your retirement, keep a fully stocked emergency fund, or even pay off your debts.

Warning signs to look out for

Lifestyle inflation can creep in slowly. If you are not one to constantly look over your financial budget, it can be weeks, even months, before you start to notice that you are being affected. Here are a few signs to look out for.

• The amount you are saving isn’t increasing

If you have recently gained a big pay raise, you should notice a decent increase in your savings or investing funds as well. A major red flag of lifestyle inflation is if this amount has stayed more or less the same for some time.

• Your spending has increased in several areas

This is one way to notice an issue with your spending habits. With a close review of your budget, you can usually spot the difference between a strategic improvement to your quality of life, such as a new car or more apartment space for a new child, as opposed to just spending money across the board.

• You don’t have a strong handle on your finances

Unfortunately, a feeling of guilt whenever you decide to check-in on your bank account is often a good sign that you have spent far more than you should have. As mentioned earlier, it is easy to lose yourself to a spending spree once you have gained a big paycheck, since it is often accompanied by a big boost to your self confidence. 

What you can do to avoid lifestyle inflation

Avoiding lifestyle inflation is crucial to building up your wealth and financial health. Just remember that you don’t have to go to the extreme and deprive yourself of all worldly possessions like a monk.

You can still treat yourself once in a while, but you also have to keep the big-picture in mind. This means reviewing major lifestyle decisions like where you live and how many children you will have, not whether or not you will eat out for lunch every week.

1. Make gradual changes to spending

Spend modestly if you want to reward yourself with your extra earned income. Don’t go all out in just the first week.

Once the thrill and excitement blows over and the dopamine high wears off, you will be able to more clearly assess your new financial situation and make appropriate adjustments to your budget and savings.

2. Curb your impulse purchases

A sudden boost to your income means you will likely feel less restraint when it comes to spending. As such, impulse purchases are one of your greatest enemies. One strategy you could try to use is creating a wishlist. Fill the list with whatever you wish to buy and review it after every month or so. This gives you time to calm down and rethink your purchasing decisions.

If you still really want the item after some time, then go ahead and buy it. However, you may find that you might not need them right now and that you can live without them for a little longer.

3. Don’t stray from the plan

One of the most basic things to do when it comes to money management is to create a budget and stick to it. One trick you can use to prevent things such as impulse spending is to wait until you have reviewed your budget. Rather than immediately going out to spend your extra cash, reorganise your budget for the next few months and allocate a little extra to your hobbies and celebrations.

The remainder can then be allocated to more savings, investments or be used to pay off debt. This can also allow you to assess your financial goals and make sure you are acting accordingly.

Accurately calculating how much you are allowed to spend is key to preventing lifestyle inflation. After all, there is a very thin line between callous spending that leaves you in financial ruin, and being overly frugal that you are not living a life that makes you happy.