How to know if you’re guilty of lifestyle inflation (and how to prevent it)

Most people are used to getting by on very little money or struggling to make ends meet when they’re in college or recently graduated. That’s because many students and new grads don’t have very high salaries — and many young people are often stuck paying off student loans.

Being able to get by on less is important when you’re young with lots of financial obligations and a low income. But as you gain more professional experience, chances are good your paychecks will rise. The problem is that when you start to earn more, you’re at risk of falling victim to lifestyle inflation.

Preventing lifestyle inflation — or at least limiting it — is important if you want to accomplish your big-picture financial goals, such as paying off credit card debt, saving for retirement, or buying a house. It’s also important if you don’t want to end up living paycheck to paycheck forever. But how can you know if you’re guilty of lifestyle inflation, and what can you do to stop it? Keep reading to find out.

What Is Lifestyle Inflation?

Lifestyle inflation, also called lifestyle creep, is a classic example of a phenomenon known as the hedonic treadmill — the never-ending pursuit of more. It’s akin to chasing rainbows and never reaching the end.

When lifestyle inflation occurs, your spending and your “needs” increase along with your income. An example would be if you got a raise and bought a newer car and a bigger house so the entirety of your raise — or even more — is eaten up by the added bills you now have to pay.

When Does Lifestyle Inflation Usually Occur?

Lifestyle inflation can occur at any time, but it usually happens when you get a raise or move up to a higher-paying job. Your income goes up, so you end up feeling as though you can afford to treat yourself more.

The problem is that when you get a raise or increase your income, your first consideration should be how to use your raise to accomplish financial goals. Your added income from your higher salary could be used to make extra payments on student loans, to wipe out credit card debt once and for all, or to invest more for retirement. Any of these goals could help you increase your net worth and put you in a better financial position in the long-term — but fulfilling them is impossible if your “needs” and wants eat up most of your added income.

In fact, if you let lifestyle inflation go unchecked, your hard work and higher pay could turn into higher credit card bills and more “stuff,” like new clothes or tech gadgets you could have gone without. You also set yourself up for more problems if you end up losing your job or needing to cut back on work temporarily.

How to Avoid Lifestyle Inflation

The good news is you do not have to fall victim to lifestyle inflation. There are steps you can take inch closer toward financial independence instead of just expanding your financial obligations as your income grows. Here are a few suggestions for avoiding lifestyle inflation with good money management:

1. Set Your Budget Before You Get a Raise

Your needs, not your income, should guide how much money you budget for necessities. If you set up a budget before you get a raise or start that higher-paying job — and you stick to that budget as your salary rises — you won’t end up increasing your spending.

Your budget should allocate a reasonable amount to spend on groceries, rent, and other necessities. When you get a raise, keep spending as you did before your income increased and put the extra money toward accomplishing personal finance goals such as paying off debt, maxing out your retirement savings accounts, or establishing an emergency fund.

2. Make Paying Off Debt a Priority

When you have consumer debt, it costs you money every single month in interest — and it might be dragging down your credit score, depending on your credit utilization ratio and overall debt load.

Instead of letting your spending rise with your income, make extra payments toward debt before anything else. You could do this by increasing your automated payments so the money comes out of your checking account before you have a chance to spend it on other things.

There is some debt that doesn’t necessarily need to be paid off early and aggressively, such as a mortgage loan with tax-deductible interest and a low-interest rate. When you have these types of “good” debt, it may make sense to grow your investments before focusing on becoming debt-free. But you should still make sure you’re on track to pay off the debt on time.

Want to see how much you could save by repaying your debt early? Check out our Student Loan Payoff Calculator.

3. Write Down Long-Term Financial Goals

Another way to avoid lifestyle inflation is to set clear financial goals and allocate your extra income toward those goals instead of spending.

You should make a written list of what you want to accomplish before you make lifestyle improvements. For example, you may decide you aren’t going to buy a new car or rent a nicer apartment until you’ve dropped your student loan balance to below $10,000 or paid off all your credit cards. You could also choose to increase your retirement savings until you’re contributing 15% of your income to your 401(k) and/or maxing out your IRA.

When you have these goals written down, you can stick to them and use your extra funds to achieve them rather than allowing lifestyle creep to occur. You’re essentially pretending like you didn’t get a raise since the funds are already earmarked for other purposes — instead, you’re simply maintaining the same standard of living you had before.

When Is Lifestyle Inflation OK?

Lifestyle inflation isn’t always terrible. After all, you are inevitably going to improve your lifestyle — and no one wants to live like a college student forever, no matter how much you love ramen or boxed mac and cheese.

If you’re a few years out of college, you’ve just received a generous raise, and you’re still living with your parents, it may be time to put some of your hard-earned money towards lifestyle improvement by getting your own apartment. The most important thing is making sure you aren’t just buying stuff that doesn’t make you happy in an effort to keep up with the Joneses.

One way to make sure you’re actually improving your lifestyle on a sustainable level is to make changes slowly. So, instead of signing the lease on a new apartment as soon as you get your raise or blowing your bonus on one or two big purchases, take time to think through the best use of your money.

Whatever you do, always make sure you’re working toward fulfilling important financial goals before you spend money on improving your lifestyle with non-essential purchases or upgrades to your living arrangements.

Bottom Line

Falling victim to lifestyle inflation is common, and it can happen without you even knowing. By making a budget and being mindful of your spending, you can make sure lifestyle inflation doesn’t eat up your raises or salary increases and make it impossible to accomplish your financial goals.

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