Lifestyle Inflation: More Money, More Problems

The grass is always greener on the other side, and this applies to our finances as well. We are constantly bombarded with images of luxurious lifestyles that seem to be just out of reach. We see celebrities and other wealthy people enjoying extravagant vacations, expensive cars, and lavish homes, and we can’t help but want the same thing.

But what we don’t often see are the problems that come with lifestyle inflation. When our income goes up, our spending goes up as well, and before long we’re in just as much debt as we were before. In fact, sometimes lifestyle inflation can be even worse than regular debt because it’s harder to get out of.

So how can you avoid the dangers of lifestyle inflation? And if you’re already in trouble, what can you do to get out? Read on to learn more.

What is lifestyle inflation?

Also known as lifestyle 'creep', lifestyle inflation is the gradual increase in spending that often happens when our income goes up. It can be tempting to start spending more money as soon as our paystub gets a little bigger, but this can be a dangerous road to go down.

Before long, we may find ourselves with just as much debt as we had before, if not more. And unlike regular debt, it can be harder to get out of lifestyle inflation. This is because when our income goes up, our spending usually goes up as well, and it becomes increasingly difficult to break the cycle.

Our tax doesn't get any lower, either. The next time you generate a W-2 form could look very different after a substantial income increase. If you're earning more money and suddenly find yourself bumped up to a higher tax bracket, it's not just your lifestyle that will get inflated  – so will your tax bill!

This isn't to say that you can't ever enjoy the nicer things in life. But it's important to be mindful of how our spending can spiral out of control, and to take steps to avoid lifestyle inflation.

Simple steps to avoid lifestyle inflation

Lifestyle creep isn't an unavoidable circumstance inflicted on every wealthy person – it's a choice we make, and in many cases, it's a result of poor habit formation. 

Thankfully, there are a few simple steps you can take to avoid lifestyle inflation:

1. Create a budget and stick to it.

Creating and sticking to a budget is one of the simplest ways to keep your spending in check. When you have a clear idea of how much money you have to spend each month, it's easier to make decisions about what's worth spending your money on.

Sure, you may not need a budget according to your income, but you should continue to spend and save as though you are budgeting. That's because if and when your income decreases, you don't want to find yourself in a difficult financial situation.

2. Avoid lifestyle comparisons.

It's easy to get caught up in the comparison trap, but it's important to remember that everyone's life is different. Just because you see someone driving a nice car or vacationing in a luxury resort doesn't mean that you need to do the same.

Remember, just because you can afford something doesn't mean you should buy it. Instead, focus on what makes you happy, and save your money for the things that are important to you.

3. Live below your means.

One of the best ways to avoid lifestyle inflation is to live below your means. This means spending less than you earn, and it can be a difficult but important habit to cultivate.

When you live below your means, you're able to save more money, and you're less likely to fall into the trap of lifestyle inflation. It may not be easy at first, but with time and practice, it will become easier.

4. Create a savings plan.

Along with living below your means, it's important to have a savings plan in place. A savings plan is essentially a roadmap for your money, and it helps you to stay on track with your goals. 

Again, you may not see a need to save money when your income is high, but it's always a good idea to have a cushion in case of an emergency expense or decrease in income. A savings plan can help you to achieve this.

5. Stay mindful of your spending.

Finally, the best way to avoid lifestyle inflation is to be mindful of each and every purchase you make. Ask yourself whether the purchase is worth your money, and if the answer is no, don't buy it.

You can also look for little ways to save money here and there, as these small savings accumulate into larger amounts down the track. For instance, can you find a website that will generate your 1099 forms and handle other accounting tasks for free? Is there a more cost-efficient insurance plan you could sign up for?

It can be tough to resist the temptation of buying new things, but by staying mindful of your spending, you can avoid lifestyle inflation altogether.

Final thoughts

Have you experienced lifestyle inflation? If so, what are some of the things you've done to get out of it?

It can be difficult to break the cycle of lifestyle inflation, but with time and effort, it is possible. By creating a budget, avoiding comparisons, and living below your means, you can start to take control of your finances and avoid the dangers of lifestyle inflation.