Lifestyle Inflation – What it is & How to Avoid It

Lifestyle inflation does not discriminate – it attacks the lower, middle, and upper classes equally.

It is easy to fall into. After pitching pennies in college, you finally have a new job, and are excited to live like an “adult”. If you don’t lay the right savings plan then, you’ll find each of your raises and bonuses going towards upgrading your life, while your savings lays empty.

Below we explain what lifestyle inflation is, who it impacts, and how to avoid it.

What is Lifestyle Inflation?

Lifestyle inflation occurs when you increase spending as your income grows. If all your raises and bonuses go to upgrading a house, buying a new car, or taking a nicer vacation, your savings will become underfunded.

It is easy to get caught up with lifestyle inflation. Buying a new car or upgrading your house is a great reward for all of the hard work that led to your raise or bonus.

In reality, all of that extra spending leaves with more stuff than you need. Those expenses typically come with extra maintenance costs as well. It costs more to maintain a BMW than a Honda Civic.

Instead of rewarding yourself with more stuff to maintain and worry about, invest in yourself. What better reward is there than financial flexibility? Or the ability to retire sooner? By putting your raise or bonus into the hierarchy of savings, you’ll be rewarding yourself with something that’s priceless.

Who Does Lifestyle Inflation Impact?

Lifestyle inflation effects everyone. According to Bankrate, 34% of households don’t have enough money to cover a $1k expense. Even couples who make over $500k per year can feel like they’re scraping by.

So where is all this money going? Mortgages command a huge amount because too many people incorrectly treat their home as savings. Purchasing too big of a house can make you house poor, where all of your income seems to go towards your mortgage payment.

The other culprit is hubris. You feel wealthier, so you start spending more on little things that keep adding up. Fine dining, vacations, and shopping all put a dent in what you can ultimately save.

College graduates are ripe for lifestyle inflation once they start their careers. After living on ramen, sneaking solo cups into keg parties to save a couple bucks, and having roommates, they can’t wait to “live like an adult”.

Maybe I’m the only person who snuck solo cups into keg parties to save a couple of bucks. The point is, it worked.

How to Avoid Lifestyle Inflation

Adopt a Savings Plan Immediately

The sooner you adopt a savings plan, the sooner you won’t miss the money that is going to your hierarchy of savings. This is why college graduates should adopt a savings plan before they get their first paycheck.

If you are already in your professional career and are late to the savings party, start making changes now. We recommend the 50/30/20 Rule as a great blueprint for new savers. Start with 20% savings at a minimum, and crank that amount up as you get more raises and bonuses.

Don’t Take On New Debt Because You Can

This is exactly what happens who treat their home as part of their investments. They feel wealthier, and refinance their home to buy more disposable products like cars and televisions.

Your house can go down in value just as easily as it goes up. If the house goes down in value, your mortgage will be underwater, and you’ll still owe more in monthly mortgage payments.

The same logic goes to anything else you can finance, like a car or furniture. All of these products depreciate at rapid rates, and these debt payments will prevent you from putting money in appreciating assets like stocks and real estate.

Don’t Try To Keep Up With The Joneses

Who cares if your neighbor has a new Tesla? Or if a couple took a first class flight to Argentina? You should definitely be happy for them, but there’s no need for you to match their lifestyle.

Social media is making this need worse. People only post their best moments, and it makes the viewer feel like they are missing out.

Here’s a trick the next time you see a friend with a new car, or wish you took first class instead of coach on a flight. Think about how much money you saved, and how that money is going towards your financial freedom. The Millionaire Next Door writes about this extensively. Most millionaires got where they are by ignoring the Joneses.

By keeping the opportunity cost of savings in mind, you’ll have a better grasp of what you saved. When you invest $50k instead of spend it on a car, you’ll be $130k closer to your retirement 10 years from now thanks to compound interest. If only the Joneses could keep up with you!

Lifestyle Inflation – The Bottom Line

Lifestyle inflation is easy to fall into, and hard to get out of. It’s easy to reward yourself with a nice meal, vacation, or a new car when raises and bonuses come. We even have a saying for it, “treat yourself!”

Why not “treat yourself” to more financial freedom and retiring sooner instead? What if you put that money in an S&P 500 ETF that appreciates instead of buying some that depreciates?

There is no better way to “treat yourself” than to put your money into something that will keep paying you. Doing so increases your financial flexibility, and allows you to retire sooner.

Keep ratcheting up your savings plan as you make your money. Don’t take on new debt, and don’t worry about keeping up with the Joneses. Instead, have the Joneses keep up with you.