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How to Avoid Lifestyle Inflation

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If you are ever at a point in your life that you have a lot more money than usual, you may be tempted to spend more money on yourself. Having more money to spend can be the result of either 1) reducing your expenses or 2) a significantly higher salary or income. The temptation to spend more money in events like these is often known as lifestyle inflation.

While most people will not experience a significant change in their cash flow within a short period of time (income – expenses), when you consider that some people pay off their mortgage early or get a new job, it isn’t that rare of an occurrence to see a drastic change. It is only natural to feel like you can spend more money on yourself in times like these. Yet, effectively resisting this urge to splurge on yourself can mean the difference between financial freedom and financial disaster.

How Lifestyle Inflation Works

As I mentioned, increasing your cash flow often happens gradually and as a result of increases in income. When you think of the annual raises, this only makes sense. As you earn more money each year, it is easy to compare it to what you were making just a few months prior. The increase in salary often results from your performance or experience on the job.

If you stop and think about it, what would be the natural reaction to this increase? Most likely it is a sense of accomplishment or pride. You have just earned more money for your hard work over the year. Unfortunately in this society of consumerism, the next step is often to buy yourself something – to reward yourself for all of the hard work that you have put in. The sense of entitlement (the idea that it’s your hard earned money and you deserve it) often leads to financial ruin.

Why Lifestyle Inflation Can be Disastrous

Without even knowing it, the small changes over time can lead to financial disaster. If you start spending a little more each week, before you know it, your expenses have significantly increased from what they used to be. Instead of being satisfied with a life of simplicity, it is easy to find yourself “needing” the many luxuries of life, like a new car, flying first-class, etc. If you are not careful and before you know it, your expenses can far exceed your income. To make matters worse, the things that once were luxuries now seem like necessities and are that much more difficult to give up.

Avoiding Lifestyle Inflation

Avoiding lifestyle inflation from the beginning is much easier than trying to change after the fact. Instead of giving in to the idea of entitlement, start asking yourself what you should do with extra money before you get it. By asking this simple question, you are not letting the gradual change sneak up on you. It keeps you engaged in your finances.

If you find yourself treating yourself to more and more things as time goes by, you may even consider writing down financial goals that will keep you active in your saving. Saving money towards specific goals keeps the money from just sitting in your bank account and tempting you to waste it away.

While it may not be easy to avoid lifestyle inflation, you can achieve it if you stay disciplined. Being conscious of this temptation is half of the battle – the other half is following through and putting your money towards good use.

How do you avoid lifestyle inflation?

This post was written by Corey, a staff writer from 20’s Finances and Passive Income to Retire. He writes about his financial goals, like retiring by the age of 27, to motivate others to be responsible with their finances. 

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AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

26 Comments

  1. When I used to make a ton of money dancing I would treat everyone. This round is one me. CHEERS!!! The bill would be hundreds at a time. Since I have had lifestyle DEflation I have now say who wants to come over and break open a bottle of 2 buck Chuck?

    • Ha, yep. If you started making some decent money again, would you start buying everyone’s drinks just like last time? Or would you be more frugal today?

    • Sounds like a smart move. It’s 3 buck chuck where I’m at though..

    • I can see where it is tempting. But thankfully, my fiancee is frugal. We all have the propensity to be tempted in this area. It is what we do with the temptation. Treating yourself is okay, but making it a habit that is over-extending your budget…is not. A fine line.

  2. That is true,Derek. As an author and business man, I can relate to how you said, “Having more money to spend can be the result of either 1) reducing your expenses or 2) a significantly higher salary or income”. I hope more people discover your blog because you really know what you’re talking about. Can’t wait to read more from you!

    • Thanks for commenting Daniel! I can’t wait to hear more from you as well! I love to get feedback from my readers! 🙂

  3. The best way is to remove the income from your hands before it gets there. If you get a raise, bump up your 401(k) contribution before the raise even hits your paycheck. You’ll automatically increase your savings and by not seeing the money, you’ll resist spending it.

    • I like this idea as well. Why fight the urge when you can take it away altoghether, right?

    • Agreed – when I moved from an hourly contract position to a salaried employee position (working for the same company & even doing the same job), I took the income bump out of my hands before I even saw it. I was already doing auto-saves into our ING accounts, so all I had to do was bump them up. Win!

      • Nice – it takes discipline, but well worth it in the long run.

  4. It seems that i’m battling this right now – though my lifestyle inflation isnt in the small stuff, it’s more the bigger things my expanded cash flow has allowed.

    • Perhaps it’s time to write out some savings goals or start locking your money away before you are tempted to blow it on something.

  5. I’ve got a perfect example for ya – when I delivered pizza for Domino’s years ago I was able to put in hours on end. At first the money was enough to sustain me; over time I realized I was making some good cash (around $300 per week after expenses in the mid 90s). The cars I drove weren’t doing as well as I was because I began pizza delivery with beaters and kept them until they died. Suddenly I had money; so what did I do? I went out and bought a brand new Neon right off the lot loan payments and all (for delivering pizza mind you).

    Let’s just say the ride didn’t last long and a year later I returned the car. Five years later I settled the whole thing with the bank and they wrote it off. I haven’t bought a new car since that Neon.

    • Wow – that’s sounds horrible. It sounds like you’ve learned your lesson. 🙂

  6. I agree with having financial goals written down so you know where the money can go when more comes in. If we didn’t have a plan to complete our emergency fund and fund a Roth IRA once student loans are finished (in 2 months!), it would probably be tempting to buy a TV and not have to watch movies on our laptop anymore 🙂

    • haha – if it weren’t for my wife, we would probably have spent some of our extra money on a t.v. It’s not necessary to us.

  7. I learned a long time ago that I do not need to spend money to improve what I do. Do I need a better car or a better meal to make me happy? No! I am at a place in life where those things do not matter or maybe I have all those things! 🙂

    • That sounds like a great lesson to learn krantcents. I couldn’t agree more.

  8. I suffered lifestyle inflation when I was working long hours in the corporate world. I’d think, “Eh, 80 hours this week? I deserve to go out for lunch everyday.” I got angry with myself when it was all said and done, though, because I spent all of the money that I made by putting in extra hours!

  9. Tell you what, we are experiencing lifestyle inflation b/c our 5yo has developed a voracious appetite, and we are having to spend extra money on food!

  10. Sometimes we could use a little lifestyle inflation boost LOL. In my situation I know that when many get their tax refund they spend spend spend and have fun for a month or two then it is gone and they struggle the rest of the year.

    What we are doing this year is I will use our tax refund to boost our income level 12 months until next refund time. This additional money will greatly help the months hubby is only getting 20 hours a week and we can not cover all our bills so it becomes a precarious juggling act.

    If I manage to increase our income by other measures from home in the meantime, then I would not need it for that month but it is a relief to know we will be able to breath all year and actually “make” it rather than struggle struggle struggle, spend, spend, struggle struggle!

    • I like that you’re looking ahead in life. Rather than have instant fun, you realize that there could be some rough times ahead, and you’re planning for them. Well done! Don’t worry though, if you stay on this course, you’ll be having fun with your extra cash in no-time. Keep up the good work with your site!

  11. I’ve definitely gone through lifestyle inflation since graduating from college. My expenses now average about $3,000 per month, but I am still saving 50% of my net income each month (including my 401(k) contributions) and all of my bonuses. Sure, I could be saving more, but I’ve reached a point where I wonder if it is really necessary to save more than 60% of my net income, so I’m allowing the lifestyle inflation with one caveat: the additional expenses must make me happier.

    • Sounds like you’re doing a pretty good job Leigh. Of course we don’t have to live like college students all our lives – it sounds like you’ve got a good balance.

  12. This is a great post! I just got started myself with my very own blog and touched on this in my second post. Keeping up with the Joneses is a killer to one’s financial independence strategy.

    • Yep, stay away from those Joneses! They can really kill your finances in the long run. My wife and I are looking to pay off our house in less than 4 years. Those Joneses won’t have an effect on us!


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