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How to Avoid Lifestyle Inflation

by Ryan Guina

There is a near universal belief that having more money automatically improves a person’s personal finances.  This could be the case if an increase in income or a sudden windfall are handled properly, but it doesn’t always work that way.  More often than not, an increase in income is followed by an increase in spending.  This is commonly referred to as lifestyle inflation and while an increase in spending is not always a bad thing, there is the potential to take it too far.  Celebrities and lottery winners are prime examples of lifestyle inflation gone bad, providing proof that having more money doesn’t always equal financial stability.  Here we look at ways to avoid lifestyle inflation or at least minimize the negative affects.

How to Avoid Lifestyle Inflation

Make savings a priority. Saving a percentage of your income is the first step toward financial security.  When your income increases, your savings should increase as well.  This will not only provide adequate backup in the event of a financial emergency but also prevent excess spending.

Plan in advance. If you received a raise today, what would you do with the extra money?  Would you splurge on a big ticket item?  Maybe you would move to a bigger apartment or buy a new car.  Would you put your money in savings or invest in your future?  While some people may call this daydreaming or fantasizing, it is actually good practice in establishing a plan for increased earnings.  When you have a plan, you are more likely to put your money to good use.

Treat yourself. What is the point of working hard if you aren’t able to treat yourself on occasion.  There is nothing wrong with indulging yourself, within reason.  Being financially responsible is a lifestyle and one that requires a lot of hard work and discipline.  It is for this reason a certain balance must be achieved between what you save and what you spend to encourage financial stability and personal happiness.

Live beneath your means. An increase in income does not change the fact that living beneath your means is the single most important step in financial independence.  It doesn’t matter how much money you make if your expenses surpass your income, you are living beyond your means which will eventually take a toll on your personal finances.

Adjust your budget. With more money coming in, your budget will need to be adjusted.  A household budget is essential to make sure your financial obligations are met.  The best budget is one that accounts for every cent, allocating money for bills, savings, spending and other financial goals.  By finding a place in your budget for “extra” money, you are less likely to waste it.

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Lifestyle inflation is a natural part of life. There is nothing wrong with wanting better things or living a better life.  The problem occurs when lifestyle inflation is taken to the extreme, which can actually hinder your ability to enjoy the lifestyle you have worked so hard to achieve.  When you balance your spending with your earnings, you can prevent this from happening.


Published or updated October 18, 2010.
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{ 10 comments… read them below or add one }

1 Evan

The only way I keep lifestyle inflation down is by keeping my main checking account low. It is sad that I have to pretend that I am poorer than I really am just to keep the savings rate high lol

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2 LoveBeingRetired

Good points Ryan – I think that the awareness of your situation and active planning on the front end will help to keep things under control. If you are saving 10% and suddenly things get better, you should at least maintain that same 10% savings rate on your higher earnings, ideally increase it since you have more discretionary income. Take care of yourself but in moderation. No one knows what the future holds and it is better to be a little conservative now while you have the option.

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3 Briana @ GBR

Great points Ryan; I think that’s the issue with a lot of people. When their income increases, so does their spending. Setting some percentages around your budget can definitely help if your income increases. If you’ve been saving 20% of your savings, and you get a raise, keeping it at 20% shouldn’t hurt. The biggest thing against you is definitely temptation though

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4 Marie

Before we retired early and frugally in our 50s we did two thinks consistently….We were in year 18 of a 20 plan of ‘real jobs’ when I got laid off for a second and final time.

#1 Pay yourself first. When either of us got a raise we added most of it to our pretax retirement program and/or IRA. If the money never hits the checkbook and you don’t use credit cards than it grows. Of course this assumes you are working and getting a raise.

#2 We always converted our spending to how many extra hours, days, months, years of work … That made it easy to walk away from the bigger house and or nicer car.

You can always keep working if you want to however for us choice was the cat’s meow. Leaving work hasn’t been without sacrifices of course however the luxury of time continues to make it amazing….and who knows as we uncover a more creativity we may end up with a unexpected revenue stream.

It’s been over three years since we were employed and it’s been only fairly recently that like the Grinch That Stole Christmas that our hearts (grateful & humble) grow large.

So pay yourself first!!! Cheers.

PS Latte addict? Check out Mr Coffee expresso machine and a good bean.

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5 K.C.

Having a long-term goal helped us prevent lifestyle inflation. When our income went up, we saved the extra money. We wanted to achieve our goal as soon as possible. We made it a point to save as much as we could whenever we had the opportunity because we didn’t know when the next opportunity might come around.

We found a comfort zone for our standard of living and basically have stayed there for the last twenty-five years. Our relationship and family are what make us happy. Time is the key variable for us, not money.

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6 Kate Kashman

I want to print this out and plaster it all over town. Maybe I could include it in my Christmas cards? Oh, and I absolutely need a teensy copy in my wallet. I think back to our early married years and we survived just fine on less than 1/4 of what we make now. We bought a house and I didn’t count pennies at the grocery store. We also wore clothes until they evaporated (especially shoes) and budgeted with true enthusiasm.

While we are still doing fine, we have certainly let our lifestyle creep up as our income has increased. Bigger house, nicer car, and a lot more frivolous spending. Just imagine what we could accomplish if we were as conscientious as we were.

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7 Ryan

I think it’s all about balance, Kate. You should increase your lifestyle as your income increases, it’s just a matter of how much. Another important factor many people forget is planning for emergencies – you need to increase your emergency funds and adjust your emergency plan as your fixed expenses increase. Otherwise, you are risking a financial disaster!

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8 Joe Plemon

Planning in advance is a great tip. Reality is that, throughout life, people incrementally make more money. Having a plan will allow SOME lifestyle improvements while avoiding impulse spending. Something as simple as agreeing (if married) to increase retirement investing by one half of every pay raise is a way to plan in advance.

The opposite of impulse spending could be hoarding, so your third point of treating yourself should be heeded. Thanks for giving us a balanced perspective.

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9 Dave Richardson

Seeing your savings increase helps to remove money anxiety about the current economy downturn. Regular saving gives you peace of mind as you get older and are not as robust.

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10 First Gen American

Don’t forget the tip of “hide money from yourself”. If it’s sitting there in my checking account I’m tempted to dream up fun uses for it. Best that the money never makes it that far. I’m much better off if it goes directly into a brokerage account or my mortgage balance.

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