What Is Lifestyle Inflation and Why Should I Avoid It?

Tell me if this scenario sounds familiar:

You start out as a young adult with no money, a low paying job, and few possessions.

If you’re lucky, you have an old vehicle, and most of the furniture in your small apartment is either from a thrift shop or made of milk crates.

It’s a stark existence, but eventually, you earn a promotion at work, and you earn a little more money.

With this extra cash coming in you decide it is time to upgrade your lifestyle. Perhaps you’ll buy a new car, move into a nicer apartment, or purchase better quality furniture. Maybe you’ll do all three.

This is called lifestyle inflation, and it can be a financial trap.

While the scenario I described above sounds innocent, when extrapolated over the course of your working life, lifestyle inflation can easily get out of hand. It can hinder your ability to save for your future, force you to continue working in a job you hate, and even leave you financially vulnerable in the event of illness.

For these reasons, lifestyle inflation is best avoided or at least kept under tight control. While a certain amount of lifestyle inflation is healthy, it’s important not to let your lifestyle inflate too much. Yes, you want to be comfortable, but you also need to leave room in your budget to save money, pay off debt, and invest for your future.

There are much better things to do with your money than use it to inflate your lifestyle. Here are some of the things I do with my money, instead of spending it.

First, I invest for my future. I’d like to retire someday, so I make sure to send a healthy portion of my income towards retirement every month. You can do the same by avoiding lifestyle inflation sending your money towards your retirement instead.

For example, if you save $700 per month towards retirement starting at age 30 and invest it at an average rate of return of 5%, you’ll end up with $758,690.58 at retirement.

Second, by avoiding lifestyle inflation and keeping expenses low, you can work by choice, not because you have to pay for an expensive way of life. For example, as my income has increased over the years, I have opted to save more and more of it instead of spending it. As a result, my husband and I can live comfortably on 50% of our income.

Saving 50% of my family's income has benefits. If one of us decides that we just can’t stand working any longer, we can quit without having another job lined up. If one of us becomes ill, we can rest assured that we'll stay financially afloat on one income.

Avoiding lifestyle inflation has many benefits, but how do you do it? There are two primary strategies that I’ll outline below:

The first and easiest way to avoid lifestyle inflation is to save your raises. When you receive a raise at work, instead of considering all of the ways you could spend that extra income, plan how you are going to make that money work for you by saving it.

Personally, whenever I receive a raise I first increase my retirement contributions, then send the rest into regular savings. Keeping my raises prevents me from using the money to rent a more expensive apartment or upgrade my car.

If you are currently living a very deflated lifestyle and would like to improve your living situation slightly, then saving 100% of your raises won’t work for you.

Instead, you could commit to saving a set portion of your income.

For example, let’s assume you earn $2,000 per month, and you are committed to saving 30% of your income. That means every month you’ll save $600 and you’ll have $1,400 left over to spend.

If you land a new job where you earn $2,300, and you stay committed to saving 30% of your income, you’ll save $690 and have $1,610 left over to spend. Saving a portion of your income allows a certain amount of lifestyle inflation within a reasonable amount while still keeping plenty of money in the bank.

Above all else, the best way to avoid lifestyle inflation is to be content with your way of life. Learning contentment is probably the hardest part of lifestyle inflation avoidance to master, but it is the most important. If you are always plotting to buy the newest car, a nicer home, or the latest electronics, you are more likely to stay on the consumption treadmill.

The best way to avoid longing for consumer items is to decrease your exposure to them. That means not watching commercials, reading magazines or subscribing to sales alerts reminding you that you don’t have the latest iPhone. It takes practice to master this skill, but learning to be content with “enough” will make you happier and more financially prosperous.

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