How to Avoid Lifestyle Inflation

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Are you spending consciously, or keeping up with the Joneses?
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. …

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

Are you spending consciously, or keeping up with the Joneses?

Identify Wants and Needs

We live in one of the most affluent times in history. Cars, refrigerators, microwaves, electronic gadgets, streaming television, smartphones, and a host of other consumer items that we consider essential to our modern day life would have been extreme luxuries (or even unimaginable) to our grandparents generation when they were growing up.

The difficult part comes when trying to determine which of these luxuries is necessary, and to what degree. What constitutes a true need?

These are our essential needs: food, shelter, clothing, and a way to make a living.

All of these needs can be met with varying degrees of luxury. A steak dinner versus a simple salad. A McMansion versus living in a modest 3-bed, 2 bath home. Designer threads compared to department store brand clothing. A luxury vehicle to drive 5 miles to work versus a late model used vehicle.

There’s nothing wrong with enjoying the conveniences of life — if you can afford them without going into debt. However, it’s important that you recognize lifestyle inflation for what it is and not confuse these conveniences with needs.

Get Your Financial House in Order

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.

Avoid Debt. Debt mortgages your future. The more debt you take on today, the more difficult it will be to make ends meet later.

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 within 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.

In many cases I can afford to spend more money on certain things, but I choose not to. Instead, I prefer to seek out deals, find ways to earn more money, or do without expensive luxuries if I don’t need them. This extends into other aspects of my life as well. I try to conserve electricity and other resources, recycle waste, and in general consume less.

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.

Need help with your budget? Here are the Best FREE Online Money Management Tools.

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.

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About Ryan Guina

Ryan Guina is the founder and editor of Cash Money Life. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.

Ryan started Cash Money Life in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about military money topics and military and veterans benefits at The Military Wallet.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free account here.

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  1. K.C. says

    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.

  2. Kate Horrell says

    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.

    • Ryan says

      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!

  3. Joe Plemon says

    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.

  4. Dave Richardson says

    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.

  5. Sandy says

    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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