Lifestyle Inflation
Have you ever heard a rich person say “We live paycheck to paycheck”? You probably have, and rolled your eyes. But the truth is, that rich person probably is living paycheck to paycheck.
The reason? Lifestyle inflation.
What is lifestyle inflation?
Lifestyle inflation (also called lifestyle creep) is when our spending rises to match our income.
For example, let’s say you change jobs, going from a $50,000 salary to $75,000. Amazing! Now you have an extra $25,000/year, or over $2,000/month!
So…what are you going to do with it?
First, you buy a nicer car. With an extra $2,000 per month, now you can afford the car payment. Then, you decide to replace a monthly date night with a weekly date night at a nice restaurant. Next, you finally book that vacation to the Bahamas you’ve been talking about for years - because you deserve it!
Suddenly, that $75,000 doesn’t seem like enough anymore. Now, you have car payments and credit card debt from your trip to the Bahamas, so you really need to be making $100,000 if you want to have a good life.
Does this story sound familiar?
This is why it’s called lifestyle inflation, because your expenses slowly creep up on you until you’re spending more than you realize.
You were getting by just fine on $50,000, but now with a $75,000 salary you think you need a better car, a better date night, a better vacation, because of course you “deserve” them for all your hard work.
To be clear, I’m not saying you don’t deserve nice things. If you’ve been buying a beat-up old car for years, and now you finally have a better job and can afford a new car, by all means buy the new car. Just be intentional about that purchase.
The Void
As humans, it’s natural for us to want to fill a void. In this case, the void is - what do I do with an extra $2,000 every month? It’s natural to want to spend it on things that you denied yourself when you didn’t have that money.
Maybe it was - I can’t afford organic food, I can’t afford that nice handbag, I can’t afford a monthly massage, but now that I have an extra $2,000 I can.
This is what happens when we don’t live intentionally. If you don’t have a goal for that money, it’s easy to spend it on smaller things until you eventually end up where you started, wondering how you now make $75,000 and still don’t have any savings.
Put another way, if you go from a $50,000 to a $75,000 salary, you’ll make an extra $25,000 per year, or about $2,000 per month. You could spend that $2,000 on a nicer gym membership, a new sofa, or going out to eat more. But what if you decided to live your life exactly the same way as you did when you made $50,000, but you put the extra $25,000 aside for a 3 week blow-out vacation to Europe next year? First class tickets, nice hotels and expensive bottles of wine in the south of France? I’d give up a new sofa for that.
Stopping Lifestyle Inflation
A little bit of lifestyle inflation is natural. Can you imagine someone making $300,000/year eating ramen and mac & cheese, like they did in college, because they didn’t want to “inflate” their lifestyle? That would be ridiculous. But it’s easier than you think for expenses to creep up on you. Before you know it, you’ll be thinking again “If only I could make an extra $20,000 that would change everything”. That didn’t work last time, so why would it work this time?
Fortunately, there are some ways you can manage lifestyle inflation.
1. Set goals.
Get real with yourself about what you want to do with your money. Plan an amazing vacation with your spouse? Have a huge surprise party for your mom’s 60th birthday? Pay for your child to go to private school?
I don’t care what your goal is, I care that you have one. $25,000 is a lot of money, and it can go a long way to helping you plan that amazing vacation, save for a downpayment for a house, or buy a new car to replace your old beat up one. But that $25,000 can also slip away faster than you can believe if you don’t pay attention.
Decide on your goal. Then decide exactly how much money you need for it. Use that raise like a turbo boost to reach your goals.
2. Decide how much to save & spend.
Once you know what your goal is, and how much you have to save to achieve it, decide how much you want to save every month and year to get there. If your goal is to take a $15,000 trip to Indonesia, great! Put aside the $15,000 of your $25,000 raise for the trip, and you get to spend the extra $10,000 on other purchases. You don’t have to feel guilty about spending that money, because you know you’ve already set aside what you need for Indonesia.
3. Make a Buy List.
If you’ve been thinking forever about a new sofa, a pair of designer sunglasses, or new athletic gear, great! Just be intentional about your purchases and set yourself a budget. “I will use $500 this month to buy myself some new clothes for working out”. Follow the motto: I can buy some things, I cannot buy everything.
Making more money is great. It can help us get out of debt faster, save up to buy our dream home, or take amazing vacations around the world. But that money can slip away faster than you know if you aren’t intentional about how you spend it.
Action items:
Take an honest look at your credit card statements from the past few months. Were any of your purchases impulse buys? Did you spend on something that you’d been saving for? Did you buy something that you didn’t really need, but it was convenient at the time? What could you have done better with your spending?
Make 2 savings goals. The most important part of stopping lifestyle inflation is having a goal to work towards. Decide on your goals and set a budget for them.
Set a spending limit. If you tend to be an impulse buyer, give yourself a limit in which you have to wait before purchasing. For example, for any single item over $100 I have to wait 24 hours before purchasing. Using this technique can help curb impulse buying, and allow you to spend more intentionally. If you’re still thinking about that item 24 hours later, go back and buy it, knowing you’ll be happy with that purchase.
Your life may not be perfect, but it is imperfectly yours. The only way to live it is your way.
