What is Lifestyle Inflation?
Lifestyle inflation, also known as lifestyle creep, refers to increased spending after a person’s income increases. Lifestyle inflation tends to escalate each time a person receives a raise and can make it challenging to save for retirement, get out of debt, or meet other long-term financial goals. Avoiding lifestyle inflation is the only way to break the cycle of living paycheck to paycheck.
Lifestyle creep, or lifestyle inflation, happens when your expenses increase along with your income. Combatting lifestyle creep means putting your money toward valuable channels, such as retirement accounts, instead of generating new debt just to achieve your short-term goals, like buying an expensive car in cash or using your debit card, for example. When you avoid lifestyle inflation, you gain the financial flexibility to reach your savings goals and create a more fulfilling life by getting your dream job instead of always chasing the money.
Nine Ways to Avoid Lifestyle Inflation
1. Sticking to a budget
Salary Finance, a lending institution in the UK, recently produced a report which found that people fall into five categories in the workplace, as outlined in the graph below. These five categories are Strugglers, Copers, Builders, Planners, and Prosperers, with Struggler obviously being the worst category to find oneself in and Prosperer being the best. Now, here is where it becomes interesting. What they found is that all the five categories understand the importance of saving and having a reasonable budget. Check out the graph below.
What differentiates a financial Prosperer from a financial Struggler is their capacity to enforce and stick to a budget. Salary Finance found that only two of the categories, financial Planners and Prosperers, have built the discipline required to save instead of making impulse purchases. So stick to your budget as much as possible!
2. Automate savings
Automating savings can help you benefit from reverse budgeting and give you a great savings structure. Set up an automatic transfer from your current account to a savings account as soon as you get paid, and I guarantee that after the first few months, you will adjust your spending habits accordingly and won’t even miss the money.
3. Spend money mindfully
Challenging the status quo in your spending and embracing gratitude can help shift your perspective to ultimately a happier and more disciplined consumer. So often, lifestyle inflation creeps up as one small spending choice is added to another, and before you know it, you have accumulated a whole host of unnecessary expenses, which often add little to your overall wellbeing. If it’s not an essential item, just pause and reflect before you spend money on it.
4. Income increases = savings increase
Small lifestyle upgrades can be justified when your income increases, but you don’t need to spend all your extra money. In fact, you should avoid doing so. A pay raise should mean an extra saving increase, and by increasing the monthly automated amount, you will ensure that as you earn more money, your savings work more for you too.
5. Set a splurge budget
Bestselling author Jordan Peterson has a chapter in his book “Treat Yourself Like Someone You Are Responsible For Helping” and his advice definitely rings true here. You can’t be a tyrant to yourself. It’s not sustainable. Decide how much to give yourself for purely fun stuff each month or each time you receive a raise or a bonus. Then stick to it and squirrel the rest of the money away to build wealth and achieve your long-term financial goals.
6. Upgrade areas of your life gradually
If your income receives a boost, it might be tempting to buy a property, upgrade your wardrobe and buy a membership to a more expensive gym all at once, but it’s not a good idea. Introduce lifestyle upgrades gradually to test the new budgetary waters and ensure that you aren’t overcommitting on monthly expenses. Monitoring how your spending increases as your income increases is the key to achieving financial independence.
7. Find your lifestyle tribe
Feeling the need to ‘keep up with the Joneses’ is stressful and a deeply unsatisfying way to live. Surround yourself with friends whose lifestyle goals and personal finances are aligned with yours and who won’t constantly be tempting you to overstretch yourself and derail your long-term financial goals.
8. Live within your means
That means saying no to certain things in your life. Yes, many of us desire wholeness & completion across the various areas of our life, but at what cost? Even the most reasonable version of yourself would acknowledge that buying things you can’t really afford will not serve you well in the long term. And if you do plan on making a large purchase, such as putting a down payment on a house or a brand new car, my only question would be, have you sat down and worked out the numbers? People buy on emotion, of course, but big financial decisions should be broken down and rationalised before you make the final decision to buy. Impulse purchases are not always worth the credit card debt you will be forced to pay off.
9. Structure your personal finance to become debt-free
Unsecured debt such as student loans, personal loans, and credit card debt are obstacles keeping you from reaching your financial goals.
It isn’t logical to build wealth and invest in opportunities to earn passive income if you still have substantial debt that needs to be paid. If you’re generating a 25% average return on investments, but you’re still paying 25% interest on credit card debt, the best course of action is spending money on paying off your credit card instead of taking on new expenses like making investing. Instead of only making minimum payments on debt, put all your residual take-home pay toward paying off unsecured debt on a monthly basis.
Don’t make any luxury lifestyle changes until you are debt-free, regardless of any income increases. Only after your debt is paid off can you begin to work toward your ideal life and achieve certain financial goals like retiring early. Being debt-free inspires you to avoid lifestyle inflation.
Successful financial planning is all about balance
Lifestyle inflation involves choosing instant gratification over achieving long term goals. If you decide to satisfy your every whim in the present at the expense of saving for the future, you are sacrificing your long-term financial stability. The key is to strike a balance and afford yourself certain luxuries and treats while also saving for the future and ensuring that your savings rate increases proportionally as you earn more money. Actively combatting lifestyle creep will allow you to reach your long-term goals, like retiring at a young age and accumulating a saving amount that covers a range of other financial goals, including having a sufficient rainy day fund and an inclusive health care plan.
Key Takeaways
- Lifestyle inflation happens when people spend more on lifestyle luxuries when they get a pay raise.
- Lifestyle creep can ultimately result in a higher debt-to-income ratio.
- It is highly recommended to adhere tightly to a budget that allows you to contribute to savings and retirement accounts.
If this article has resonated with you and you feel you need someone to hold you accountable and would like an extra resource of a list of the average cost of many common goods and services in Shanghai, then get in touch today at jordan.donald@infinitysolutions.com.
Financial Consultant
I work as a Financial Planner with expat clients to meet their financial planning needs and goals, with a focus on adequately protecting expats & their families, and helping people to grow their savings over the long term. I strongly believe in building meaningful and lasting relationships with clients to ensure the best client outcomes are achieved.
