An often-unrecognized bad spending and savings habit comes in the form of something called “Lifestyle Inflation” or “Lifestyle Creep”.
When many people get increases to their income (even by a small amount), we see that spending—not saving—increases at a similar rate. This means each time a promotion, raise, or job change occurs, many people fall victim to spending more on certain everyday items like groceries or self-care. For others, it means turning luxury items into everyday necessities.
Though earning more is something to celebrate, lifestyle inflation can steal the additional financial stability and wellness these milestones should have provided. Instead of using that extra money toward paying down debt, saving more for a large goal, or investing for our future selves, money is put toward more fleeting items.
The first step toward fighting off lifestyle inflation is to recognize it. From there, focusing on a few of our core financial practices can help minimize the potential damage that can come from lifestyle inflation.
Regardless of how much you make, be it $50,000 or $500,000, budgeting is the only way to know how much you must spend and how much you have available to save. This one financial planning staple lays the groundwork for understanding your financial life on a deeper level.
Needs vs. Wants
That fuzzy line that can sometimes make it difficult to separate “needs” from “wants” is another culprit in the fight against lifestyle creep. We all have basic living expenses to cover each month—rent or mortgage, utilities, a phone bill, food, and debts, to name a few. However, extras like more weekend getaways or new outfits, can start to slip into the “needs” categories when income increases.
Use this simple but powerful tool to avoid lifestyle inflation anytime income increases. Calculate how much extra you can expect from your bi-weekly or monthly wages and set that to go into savings every check through automatic withdrawals or payroll deductions.
Forget the Joneses
Lifestyle inflation can be hard to avoid if you’re constantly comparing your financial life to others. Remember, you can’t know for sure what someone else’s savings looks like. Maybe they saved for several years to afford that big purchase. Maybe they are deep in debt because of it. Don’t let comparison be the pitfall to your financial stability.
Finally, be sure to review your budget and financial goals periodically. Most experts suggest checking in with your overall finances once per year or sitting down to review the numbers anytime an increase in income takes place.
Though not always fun at first, following these steps consistently can help put you on a financially healthy path for the future. Eventually, the sense of security you have from knowing how much you must spend and seeing your savings increase or debt go down you will start to receive better types of endorphins than you ever received from a new blouse.