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Lifestyle Inflation: What it is and How to Avoid It

Do you remember what it felt like cashing that first paycheck from your first job? What did you spend it on?

Most likely, you were a teenager who wasn’t used to having money in your own name. You might have blown it on clothes, video games or something else spur of the moment. Be honest — I know I wasn’t the only one spending my hard-earned cash on impulse purchases!

As a teenager, it’s chalked up to being irresponsible and naive. As an adult, this kind of spending is more often than not a result of lifestyle inflation.

avoid lifestyle inflation

What is Lifestyle Inflation

Lifestyle inflation is when you increase your spending to match an increase in income. For example, when a grad fresh out of college goes from making no money to a cool $40,000 salary, it might only seem natural to start spending more — now they can afford a new car, better apartment and professional wardrobe! It can be hard to see an end point once the money starts rolling in.

Of course, there are some natural spending increases that come with your first high-paying job or raise. But inflating your whole lifestyle to match every single bump in salary isn’t sustainable. Lifestyle inflation can make it harder for you to stay on top of your finances and cause serious stress.

How to Avoid Lifestyle Inflation

Here’s what you should do with your recently increased income instead.

Forget instantly going out and buying all the new things you can afford — instead, pretend like you never got that money and put it toward debts and important savings goals.

Pay off high interest debts

First, it’s important to pay off any lingering credit card debt so you don’t get bogged down by interest rates. Plus, getting rid of credit card debts can feel so freeing. If your credit limits increase as a result of your higher salary, don’t use it as an excuse to spend more! Banks can automatically increase credit limits as your income rises, so be aware of these changes and resist the lifestyle inflation temptations.

Save for retirement

It’s virtually impossible to save too much money for retirement. Are you maxing out your 401(k) and getting any full employer match available to you? Once you’ve hit the max for any employer-sponsored 401(k) match, open a Roth IRA and max that account out (since you won’t get taxed on this when you withdrawal during retirement).

Become an investor

In my opinion, one of the cooler topics in personal finance lately is micro-investing. You can become an investor just by downloading an app on your phone and transferring money from your bank account. Stash is my favorite — I’ve only been using it for a few months, but I’ve earned a couple cents on my initial $15 investment so far. This won’t bring in huge returns, but it’s an alternative way to save and grow your money.

Related to micro-investing … Reviewing Acorns, the micro-investing app

Save for a lofty goal

Yes, you’re allowed to splurge on a dream vacation or buy a new car. But instead of taking on debt for those purchases, save up the money beforehand. What distinguishes this from basic lifestyle inflation is you’re saving up enough money over a period of time to have a sizeable down payment. This way you can make big purchases without worrying about crushing, high-interest debt.

These money moves are helpful if you haven’t experienced lifestyle inflation yet, but what if you’ve already fallen victim to it? Don’t worry, you can reverse it with a little hard work.

Do you made good #money but can't seem to get ahead? You might be suffering from #LifestyleInflation. #LifestyleCreep is an #illusion that's hiding a very big problem that needs to be addressed. #FIREMovement #FI #FIRE

How to Correct Lifestyle Inflation

First, take a look at your spending. You can do this manually by looking at your bank account and tracking it in a spreadsheet, or using a free budgeting app like Mint. Once you see the amount of money going on compared to what’s coming in, create a budget. With a set budget, you can see where you need to cut back.

It might feel like you have a lot more money when you get bumped up to that next salary range, but instead of spending it on a nicer car or more luxurious apartment, it’s best to live within the same means you’ve been living at and use your newfound money in a productive way.

Besides, putting your money toward a savings goal, retirement or becoming debt-free will feel much more fulfilling than any new car or fancy purse in the long run.

Jacquelyn Pica is a freelancer. You can find her on Twitter @jqpica

One reply on “Lifestyle Inflation: What it is and How to Avoid It”

I love the article, a lot of great advice. Probably one of the best things people could do is to use salary increases to increase investing, then use investment returns to increase lifestyle. That way they get to have the money and the things.

I’ve started to think that there is such a thing as overdoing retirement savings. Once you get past about 15% of gross salary, you’ve easily covered yourself. At that rate you’d need to make well past six figures to max out a 401k. I’d rather see people investing the rest in taxable mutual funds so they have extra income to pay cash for expenses, including college for their kids. You can’t touch a 401k or IRA early, so you’ll never be able to enjoy your hard work before retirement age if you sock it all away for retirement.

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