After graduating from college, or moving out of your parents’ house and into your own place, it’s easy and sometimes necessary to increase your lifestyle. After all, eating ramen every single day is affordable, but not healthy. Upgrading your food budget to incorporate fruits and vegetables may be a little more expensive at first, but a healthier diet will save you money in the long term.
However, as you start to increase certain parts of your budget in the pursuit of living like a reasonable adult, it gets harder to distinguish what is a necessary upgrade and what is just you wanting to improve your lifestyle. Lifestyle inflation, or increasing your lifestyle commensurate to pay increases, is tricky to identify but can lead to financial insecurity. Before it takes over your life and budget, here are some ways lifestyle inflation manifests itself and how you can combat it. 
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Personal Capital lets you see all of your accounts in one convenient place. Sign up now for free.What Lifestyle Inflation Looks Like
In reality, lifestyle inflation is more than just increasing your budget as your salary increases. Lifestyle inflation occurs when you start to compare yourself to others and become dissatisfied with what you have. In order to combat this dissatisfaction, you buy things you think will improve life. Examples of lifestyle inflation could be:
- Throwing yourself an extravagant party when you turn 30 because you “deserve” it
- Buying a brand new car because everyone at your company drives a 5-year-old or less car
- Purchasing a bigger home than you need because you can, then having to fill all the empty rooms
You know you’re encroaching into lifestyle inflation territory when you tell yourself “if only I made 5% more, then I could save for retirement” or “when I get my bonus, then I can start my emergency fund.” If you’ve started a new job or received a raise, can pay all reasonable bills to put a roof over your head, yet still can’t save anything? You might be into lifestyle inflation territory.
Why Lifestyle Inflation is So Insidious
In addition to not adding much to your happiness, lifestyle inflation can keep you from achieving financial stability. According to The Pew Charitable Trusts, 55% of American households are “savings-limited”, meaning they can replace less than one month of their income through liquid savings. The typical low- to middle-income family can only replace 2 weeks to 4 months of lost income – total.
Earnings growth has also been stagnant. In many companies and organizations, productivity has increased but wages have not raised as quickly, if at all. Consider your last raise: how long had it been before that raise? How often can you reasonably expect a raise like that? If you can’t expect a raise on a regular basis, the income you bring in now should be the only income you budget from – not future income you expect to make.
How to Combat Lifestyle Inflation
Keeping lifestyle inflation at a distance will be a consistent challenge, especially as you do increase your salary. Luckily, there are several steps you can implement that will make beating lifestyle inflation easier throughout your life.
Keep a Budget & Pay Yourself First
We all know about the importance of creating a budget. Creating a reasonable budget can show you where lifestyle inflation is creeping in and can help you decide what’s most important to you in life.
When creating your budget, make sure to pay yourself first. This could mean setting aside as little as $100 per paycheck in order to fund your emergency savings, or saving 10% a month for retirement. By immediately reducing your paycheck and saving for your future self, you’ll automatically reduce your ability to increase your lifestyle.
Determine Your Priorities
Before you assume I’m telling you to live a boring life, with no fun expenses ever, let me assure you I’m not. In fact, I want you to figure out what’s important to you and then spend your money on it. There are things in life you’ll love to do, even if others see them as frivolous, but you should enjoy your money as much as possible.
For example, my fiancé and I love to travel. Some may see our travels as wasting our money instead of investing it soundly. However, my fiancé and I have reduced our lifestyle in other ways, such as an affordable house and a limited clothing/entertainment budget, in order to afford our travels.
If a scuba diving habit is your priority, budget for it! It’s your passion and, as long as you’ve reduced expenses in categories you don’t care as much about, you’re not falling a victim to the lifestyle inflation trap. Same thing goes for you if you love to cook and want to spend money on expensive equipment or nice ingredients: as long as you’ve made a reasonable budget, there’s no reason not to enjoy your money on a hobby you love!
Forget Comparisons
Avoiding lifestyle inflation is easier once you stop comparing what you have to what others have. Everyone has different priorities and expenses, and that expensive 30th birthday party your friend had might not have been as extravagant as you thought. As long as your budget and savings works for you and your family, that’s the only thing you need to worry about.
Sometimes lifestyle inflation makes a lot of sense. After all, we’re not designed to lead boring lives devoid entirely of fun. You work hard for your money and should enjoy the money you’ve made, but it’s easier to enjoy it if you have a plan. There’s a happy medium between lifestyle inflation and enjoying life, and it’s up to you to determine your own priorities for financial security and happiness.
Lifestyle inflation is something we are currently fighting against. Our income is growing but I don’t want anything else to!
That’s the problem to have, Michelle! Being aware of lifestyle inflation is definitely a good way to avoid it 🙂
It’s so easy to inflate your lifestyle without realizing it. Following a budget and reviewing your financial goals are important.
That’s so true, Tre! Setting financial goals and sticking to them is one of the biggest ways to avoid lifestyle inflation 🙂
Our biggest sign of lifestyle inflation is our increased visits to Starbucks. My husband’s income has increased nearly 300% in the last 10 years. We’ve managed to keep the majority of the inflation at bay by regularly putting the pay increases towards 1) paying off our mortgage, and 2) a larger grocery and entertainment budget for our growing family.
Whoa, that’s great, Janeen! I completely understand some Starbucks visits every once in a while. 🙂 Great job keeping your priorities in mind even as your income has increased – it sounds like you guys are on the right track!
This is awesome. It’s so easy to fall into that “I’ll do it when I make more,” trap, and it can be a dangerous one. We find that we inflate our lifestyle the most when we’re unhappy. We try to buy ourselves “treats” that we don’t really need. Our happiness levels, interestingly enough, haven’t necessarily correlated with our income levels. When we’ve allowed ourselves to get further away from our values as far as how we spend our time at work, home, etc., that’s when we start seeing the justifications coming out.
This is great advice. Not keeping up with the Joneses is one of the best ways to ensure financial success. You have to live within your means at all stages of life.