The urge to splurge can be irresistible, especially in an age where we’re constantly bombarded with ads and pleas to spend our hard-earned cash. Lifestyle inflation, the subtle increase in spending as income rises, can sneak up on the best of us. Here’s how to avoid this trap and take control of your finances.
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What is Lifestyle Inflation?
Lifestyle inflation, also known as lifestyle creep, happens when you increase your spending in tandem with your income. As you earn more, you start to indulge in more luxuries, often without even realizing it. This can mean choosing a more expensive car, dining out more frequently, or upgrading your electronics. While these changes may seem insignificant, they can accumulate and derail your financial goals.
Spotting the Signs of Lifestyle Inflation
What makes lifestyle inflation so damaging is the fact that it slowly creeps up on you. Most people don’t drastically increase their spending overnight––they start spending more over time as their income increases, which makes it difficult to recognize. Here are some signs to look for to ensure things don’t get out of hand.
Increased Spending
Simply put, if you find yourself spending more money than usual, you may want to take a step back and consider if you might be falling victim to lifestyle creep. There’s no harm in treating yourself from time to time, but it’s important to consider where your money is going and what purchases are actually necessary.
Lack of Savings Growth
Have you noticed a savings slowdown? If so, you may be experiencing lifestyle inflation. Most experts recommend saving 10 to 20% of your income each month, whether in traditional savings accounts or retirement accounts. Saving less than 10% can indicate bad spending habits, so it pays––quite literally––to take a closer look at your finances.
Impulse Upgrades
Do you really need the new iPhone, or is that extra cash burning a hole in your pocket? Frequently upgrading your gadgets, wardrobe, or vehicles can be another sign of lifestyle creep. Over time, unnecessary upgrades can rewire your financial taste buds, making you desire increasingly luxurious products.
The Hidden Costs of Lifestyle Inflation
When left unchecked, lifestyle inflation can seriously wreck your finances. Failure to control your spending may result in the following consequences.
Delayed Financial Goals
For young people especially, retirement may seem far off on the horizon, but it’s important to start saving early. Lifestyle inflation can derail your retirement plans, as well as any other long-term financial goals you might have. With more income diverted toward spending, there’s less available for wealth-building and goal-oriented saving.
Increased Stress
Lifestyle creep often brings short-term satisfaction, but it can lead to higher stress in the long term. Higher spending patterns create pressure to maintain income levels and performance at work, as any income loss would have an immediate impact on lifestyle. For many, this stress is exacerbated by debt, as they turn to credit to sustain a costly lifestyle during financial dips.
Limited Financial Flexibility
Rigid spending obligations equal reduced financial flexibility. When you’re allotting a large portion of your pay to discretionary spending, it leaves very little wiggle room for true needs and emergencies. A lifestyle that demands a consistently high income can trap people, making it challenging to explore new career paths or cut work hours if desired.
Breaking Free from the Cycle
So how do you put a lid on lifestyle inflation? Is it possible to stop spending once you start? Absolutely! Even if you find yourself in the throes of lifestyle creep, hope is not lost. Here’s how you can break the cycle and return to healthy spending habits.
Budgeting
The best way to halt lifestyle inflation is to make––and stick to––a budget. A popular piece of advice is to follow the 50/30/20 rule, which states that 50% of your income should go to necessities (like food and shelter), 30% towards wants, and 20% to savings and/or debt payments. By following this principle, you can maintain consistency in spending, whether you’re making $50,000 or $100,000.
Mindful Spending to Avoid Lifestyle Inflation
Though it’s much easier said than done, practicing mindful spending can help curb lifestyle creep. Before making a purchase, stop to consider whether you truly need it, or if there’s a more affordable alternative that could work just as well. Remember your long-term financial goals and that the purchases you make in the here and now can really add up over time and impact your future.
Seeking Financial Advice
It never hurts to seek financial guidance if you’re struggling to get your spending under control. A financial advisor can work alongside you to develop a plan that works for your situation. They may suggest a better budget or offer some tips to align your short-term financial needs with your big-picture goals.
Stop Lifestyle Inflation in its Tracks
Getting a raise is definitely a cause to celebrate, but before you start planning major purchases, it’s important to consider how they fit into your overall financial goals. Even the little things add up, and so regardless of how much you make, be sure to stick to a budget. That way, you can enjoy the finer things in life while leaving room for savings.
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