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. Emily says

    It’s hard to understand people who, in this economy, are NOT frugal. The future’s pretty uncertain, and you don’t have to look far to see someone who had it made and now has a heap of problems (can Ed McMahon please raise his hand?).

    And, on a personal note, it’s very hard to watch people who were once frugal become “entitled”. I mean, you had this amazing set of skills, growing your own produce, shopping with coupons, reusing everything, and then you throw those skills away because suddenly you have too much money? Somehow, that’s the saddest thing to watch.

  2. eric says

    I do it because I don’t want to add to the statistics of our nations Lowest savings rate since the depression. I do it because I want to accumulate wealth and not be like my father who, at 53 years of age can’t come to see his grandson because he has to work in order to pay his bills and does not get much vacation time. I do it because I don’t need to spend wildly and keep up with my neighbors.

  3. Emily says

    It’s definitely a way of life. As I grow and learn and change and my financial picture changes, I don’t ever want to be who the first poster described. I am not living this way like it’s a 6 month crash diet to get ready for my reunion and going back to my old ways once I don’t have to anymore. Setting the tone for my life young will hopefully make for a more comfortable life in the future, but I hope to always keep the appreciation for what I have and not ever feel entitled or take what I have for granted.

  4. deepali says

    For me it’s about making sure that my lifestyle reflects my values and principles. I believe that less stuff = less stress and less impact on my environment, and more social and environmental justice. So being frugal is part of that. It’s not the whole thing though – sometimes my values require me to not buy the “cheapest” thing, so potentially that makes me less frugal.

  5. [email protected] the Frugal Life says

    It’s a way of life, a means to an end, and I make it into a game to keep myself motivated. Frugality, conservation, and respect for the environment are deeply held values for me. So my way of life reflects that. Frugality is also the means for us to pay off our mortgage very early, which is my primary financial goal at the moment. And I get a lot of cheap thrills by finding “tricks” that save us money. Two of the best “tricks” are gardening and knowing how to cook, which means that we eat exceptionally well, for a fraction of what most people spend on bad or mediocre food.

  6. Meg from FruWiki says

    Growing up, frugality was just common sense. My mom raised me without a lot of money, but I never felt ‘poor’. In fact, in many ways, I think I was better off than friends whose parents made a lot more money but who bought a lot of crap and didn’t take care of things.

    When I moved out, I did alright out of necessity (poor college student) until my husband and I started living together. I sort of got used to him spoiling me, and we both felt too tired and busy to try to eat at home (and our cooking knowledge was as our small apartment “kitchen”). Combined with college expenses for us both, a period of unemployment, and some other unexpected expenses, we got ourselves pretty deep in debt.

    We’re still working on climbing out of our hole, but we finally turned things around. We had tried just simple “not shopping” but that didn’t work. Finally, I started researching frugality the way I researched other interests in the past. And my husband has been very cooperative when I suggested making changes.

    Sure, there are some things I might do differently when we have more money, but mostly I think I’d buy higher quality items that I can’t afford right now and fix up our house more.

    Most of the things we do revolve around not wasting stuff and I don’t see any reason why having more money means we should start wasting what we have and trashing the environment. And sometimes it does turn into a game, like seeing how we can improve our financial numbers from week to week, or see how little garbage we can produce.

    Plus, a lot of other things we’ve started doing are just fun. For example, I have a lot of new cheap/free hobbies like birdwatching, learning about (and eating) edible wild foods, gardening, caring for our chickens, taking walks with my husband, cooking, reading books from the library, etc.

  7. Evan says

    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

  8. LoveBeingRetired says

    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.

  9. Briana @ GBR says

    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

  10. Marie says

    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.

  11. 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.

  12. 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!

  13. 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.

  14. 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.

  15. 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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