Lifestyle Inflation - What is It and How Do You Beat It?

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By John Boitnott
Reviewed by Lauren Bringle, AFC®

I remember the first time I got a significant raise when I started a higher level job. My paycheck seemed to double overnight and I had enormous purchasing power. This newfound “wealth” was exciting, and the extra money made me feel it was okay to spend more money. This extra cash made me feel like I had financial independence or financial freedom.

After all, it was just sitting there in my checking account.

It's common to increase spending behavior when more money flows in. You feel like you have more financial flexibility for large purchases. For some, this behavior leads to living paycheck-to-paycheck and buying more than they can afford, even though they're making a salary you'd think would prevent that kind of financial anxiety.

This type of money behavior crosses all income levels. It’s so widespread there’s even a name for it: lifestyle inflation, also known as lifestyle creep. The bad news? It can hurt you financially if you’re not careful.

To minimize lifestyle inflation and remove this obstacle to your healthy financial future, let's break down what it looks like, how you can spot the signs of lifestyle creep, how to beat it, and how to avoid it in the future. That way you can set and achieve good financial goals and create an appropriate spending plan.

What is lifestyle inflation?

Lifestyle inflation is any change in spending behavior directly related to an increase in your income – meaning your spending goes up as your income increases.

It’s difficult to imagine that someone who makes $500,000 per year can only save a few thousand dollars, but it happens frequently.

Rather than paying off debt such as student loans, creating an emergency fund or opening a retirement account, they buy “stuff.” They don’t think about financial goals, and instead they’re living in the moment and buying impulsively.

Red flags that lifestyle inflation is happening to you

While some red flags of lifestyle inflation may be unique to you, there are some general signs to look out for when your take-home pay increases.

Here are just a few…

  1. You’re not saving as much as you did last year, which could mean you’re spending more money.
  2. Your debt load is increasing instead of shrinking.
  3. You’re more focused on buying things than meeting your financial goals.
  4. An emergency hits and you don’t have any savings to cover it.
  5. You spend more money than you make.
  6. You rely on credit cards to get by each month because you don’t have enough money in your bank account.

Another example? If you’re a freelancer or small business owner, you might be stunned to realize you don’t have the cash flow to make those quarterly estimated tax payments. See our related article about managing money as a freelancer.

What causes lifestyle inflation?

There are many underlying factors that encourage this type of poor spending behavior. Looking at the psychological reasons underpinning this type of spending can help to stop the behavior before it puts you in a dangerous financial position.

Today, it seems like we’re all working more hours each week than ever before. This often leads to the mentality that a person “deserves” to buy or treat themselves.

Other reasons may involve "keeping up with the Joneses," where someone feels compelled to buy or have whatever their neighbor, friend, sibling, or social media contact has.

Underlying this psychological rationale is the belief that material things lead to happiness and therefore, the more you buy and have, the happier you are, which isn’t always true.

How to spot lifestyle expenses in your own life

Lifestyle expenses are anything other than the basic necessities for living, such as:

  • A new car or additional vehicles, boats, RVs, etc.
  • Dining out, takeout, delivery, and drive-through meals
  • Movie rentals
  • Daily coffees
  • Entertainment and trips
  • A larger home
  • A closet or two stuffed with clothing, shoes, and accessories

All of these are nice-to-have items, but they are not necessities. You can survive without all of the above and still enjoy life.

The role of impulse buying

The act of impulse buying is a considerable contributing factor to lifestyle inflation.

It’s a mindless action that encourages buying without thinking carefully. As part of lifestyle inflation, it’s about fulfilling desires and immediate gratification of wants. Just because there may be extra money there to pay for that item, that doesn’t make the item a necessity.

When you spend smartly, you don’t buy on impulse or see items as a shortcut to happiness.

How do you beat lifestyle inflation?

The first step to addressing lifestyle inflation is adjusting your mindset. Accountability can quiet that spending rationale fairly quickly.

Here are 8 ways to combat lifestyle inflation:

1 - Get an accountability partner

If you don’t have the discipline to stop yourself, get an accountability partner like your spouse, friend, or family member. They can help you shut down those lifestyle expenses.

Even having a financial advisor or counselor as a sounding board for those major purchases can help stop lifestyle creep.

2 - Set a realistic budget

Another way to incorporate accountability into spending decisions is through a budget. Seeing your income, expenses, and actual spending in black and white makes the process more realistic (and more difficult to rationalize).

Budgets help you see everything you make and how you spend it. Then you can start checking off those lifestyle expenses and see what you could save instead.

There are different approaches to budgeting. One is the zero-sum budget where every dollar gets a job and therefore nothing is available for impulse buying. This is just one example for budgeting and may not be the best approach for you, so be sure to research different methods.

3 - Set clear financial goals

With each salary increase, update your budget and see the impact it has on your savings potential. When financial changes occur, it’s smart to review existing personal finance goals or make some if you don’t have any yet.

Prioritizing these goals can also help readjust your mindset. The next time you start to rationalize a new purchase, or believe you deserve that treat, remember these goals and reconsider.

Financial goals can help you see financial security and debt-free living as two ingredients for a happier life.

4 - Automate your finances

Automating how you handle your finances may help you develop the “out of sight, out of mind” perspective on that extra money.

By automatically setting it aside into different accounts — emergency fund, retirement, and savings — you can trick yourself into believing you don’t actually have that extra money to spend.

In doing so, you can save while maintaining your current lifestyle and avoiding that urge to ramp it up. You can avoid the cycle of spending more money as you get more.

5 - Remember, more stuff = greater expenses

Remember that buying the bigger house or the extra vehicles tends to create more expense. Extra vehicles, for example, can add to both the cost of car payments and the cost of insurance.

By accounting for the true costs of splurging on items beyond the initial price tag, you may also find it easier to make better financial decisions.
When in doubt, return to your budget and add in the extra costs to get a true picture of your current financial situation.

6 - Find joy in simpler things

To put an end to lifestyle inflation, try to rediscover the joys of life that don’t come with an inflated price tag.

Explore nature, play games with friends, cook or enjoy other hobbies. They may not all be free, but they may fit your existing budget better. Invest in experiences as opposed to stuff.

Engage in these activities with friends who have a similar budget to reduce the urge to compete with others who have more. These like-minded individuals will also encourage you to stay on budget rather than tempt you to blow it.

7 - Make gradual changes

It’s easy to become used to a new lifestyle where you eat out, buy whatever you want, and treat others generously. To change, wean yourself off this lifestyle and gradually migrate to a simpler life.

Making smaller short-term financial goals can help direct these “baby steps” toward better money habits. Once you start seeing your efforts pay off, it will be easier to continue making positive financial changes.

8 - Focus on saving

Experts have conflicting opinions about just how much of your paycheck you should sock away each month in a savings account.

There are many ways to focus on better savings habits. One is to take the 30-day money-saving challenge, turning it into a competition to see how much money you can save within one month. It’s a good way to hold yourself more accountable and make the process more interesting.

Another option is to save money by living zero waste. Although more challenging, this approach to spending, saving, and living can help both you and the environment. The process focuses on becoming more mindful of our actions, purchases, and spending habits.

For example, share one vehicle and don’t upgrade electronics every time there is a new gadget to reduce your carbon footprint and, in the process, keep more money in your bank account.

What to do when you get your next raise

When that next raise shows up and you have extra income, by all means celebrate a little, then make a plan. Look at your long-term financial goals and long-term personal goals to see how they align with this new salary level.

Next, look at your existing financial obligations to see where you can use that extra money constructively, such as repaying student loans or credit card debt, current expenses, and the creation of an emergency fund.

Try to increase your savings rate before you consider increasing your monthly expenses. Then assess where you stand on specific financial goals for investing and retirement to see if early retirement might be possible.

Bottom line? It’s not that you should never increase your spending if you can afford to do it, just make sure you take care of your financial health along the way.

About the author

John Boitnott is a longtime digital media consultant and journalist who covers technology trends, startups, entrepreneurship and personal finance for Inc, Entrepreneur, Business Insider, USA Today and other major publications. See John on Linkedin and Twitter.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.

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Written on March 31, 2020
Self is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@self.inc.

Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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