Lifestyle Inflation

Let’s take a moment and rewind – back before you started your career, your relationship or your family. Let’s go back to graduation, university or moving out. Back when you ate ramen, lived with roommates and drove a car older than you (if you were lucky enough to have a car).

The good old days.

Back then, when you had more time and less money, how much did you spend? Rent, which was split between you and your roommates, was probably your biggest expense. After that, it was probably your car, if you had one. Then, it was either your grocery bill or going out on Fridays,

When you finally got a ‘real job’, everything changed. You spent some money and got a dependable car, maybe you even moved into your own place when you found someone special to share it with. When you got a raise or a better job, you moved into a home in a nice suburb. Your car became an SUV, and you spent more on gas than you used to on rent. Today, your mortgage payment is probably higher than your old monthly budget. 

You’re making so much more, but it doesn’t feel like it. It feels like you’re on a hamster wheel – working hard and getting nowhere.

Welcome to lifestyle inflation.

What is lifestyle inflation?

Simply put, lifestyle inflation is our tendency to upgrade our lifestyle to match (or exceed) our salary.

So when you’re in an entry-level job, you drive an entry-level car, live in an entry-level house, and buy entry-level groceries. When you’re in a mid-career job, you upgrade to a matching car, house and food. 

Lifestyle inflation usually happens when you:

• Graduate
• Get a new, higher paying job
• Get a raise
• Make a major lifestyle change

Is lifestyle inflation bad?

Most articles out there take a rather dim view of lifestyle inflation. But, just like with normal inflation, it’s not all bad. Very few people want the same empty fridge and unreliable car they had when they were just starting out. In fact, that unreliable car may cost more money than it saves you when you’re in your later career.

So, upgrading your lifestyle not only makes you more comfortable, it can help you save money in the long-term. 

The problem comes when your lifestyle inflation outstrips the growth of your income.

When we move up in life, we tend to find new friends that match our career trajectory. That can lead us to seeing, and wanting, more expensive things. Perhaps a co-worker has a nice watch, and a luxury car, or a bigger home in a nice neighbourhood. We see that and suddenly find ourselves wanting these things. We think to ourselves, I’m making good money. Why can’t I just buy these things for myself? So we do.

If we’re not careful, we can end up using credit cards or loans to get what we want. Then, we end up paying interest on things that add little value to our lives. Added to that, luxury items often include hidden costs, like the increased price of upkeep on the expensive car, or the longer commute from our home in the suburbs.

If we don’t keep an eye on our spending, lifestyle inflation will put us on the financial treadmill to nowhere.

That’s not a fun place to be.

The pitfalls of lifestyle inflation

1. Using risky or high-interest debt to fund your lifestyle. This can create a financial spiral where your income is going toward interest payments, leaving you treading water financially.
2. Spending now instead of saving for later. When your monthly spending on luxuries grows too fast, you have no money to invest or save. That means you’ll be retiring late, if at all.
3. Living precariously. Most of us remember those days when any unforeseen purchase could upset our budget. Unchecked lifestyle inflation can keep us in that position throughout our lives.

5 tips to help you live within your means

The key to avoiding lifestyle inflation isn’t constantly being a financial grouch and saying no. It’s to live within your means. That means you still get to enjoy the fruits of your labour, just without the guilt and stress of over spending.

Do the Math

Having some extra money kicking around after a paycheque is a great feeling, but if we don’t know exactly how much more we’re making, it can be hard to know how much more we can spend. Take into account all those extra things that come with a higher income, like taxes, and calculate how much more you’re really getting each month.

Make your budget

Now that you know how much you have to spend, start making changes to your budget (or make a budget if you don’t have one already). You can start simply with an Excel sheet, or opt for an easy-to-use app if keeping track of numbers isn’t your strong suit.

Save for emergencies and big expenses

When making that budget, build in short term savings like emergency funds and sinking funds. That will help you feel more comfortable with your spending. Not sure what emergency fund or sinking funds are? Read up on them here.

Invest in your future

Emergency funds and sinking funds will get you on the right track, but they won’t help you save for retirement. Before you set out to spend the money you’re making, set up auto deposits or reminders to make sure you’re putting money away to fund your retirement.

Have patience

When you get a big raise, it can feel exhilarating. Suddenly, all the things you wanted, but told yourself you can’t have, are possibilities. That new car, the new house, the new shoes – it can feel like anything is possible. But, don’t rush out and buy things just because you can. Wait for that initial rush to pass, so you can focus your purchasing power on things you really want, not just things you can finally afford.

Living within your means

It’s nice to have nice things. But, having a solid financial foundation adds more to your life than a new car, or a new computer. As long as you keep that foundation first, and add those luxuries later, lifestyle inflation won’t be an issue.