If I handed you an extra $500 every month for the next year, what would you do with the money?
Taking the extra $500 each month and paying off some debt, creating an emergency fund or investing it says a lot about your financial mindset.
On the other hand, if the first thought that popped into your head was something you could buy – like a new car or granite counters – chances are you might be teetering on the tight rope called lifestyle inflation!
The all too common phenomenon where as you earn more money, you increase your lifestyle! However, today we are going to talk about looking at the big picture when it comes to finances and how to avoid lifestyle inflation!
What exactly is lifestyle inflation?
By exact definition, lifestyle inflation is increasing one's spending due to the increase in their income.
For simple understanding, spending more money on stuff because you make more – commonly referred to as keeping up with the Jones's (Sorry if your last name is Jones).
The term “Rich” by definition is not what you earn, but what you keep, i.e. your net worth. So while there are plenty of heavy hitters in the earning category, there are just as many who have nothing to show for it.
And when someone makes a lot but has very little to show for it, they go the listestyle inflation bug!
How to identify lifestyle inflation in action:
- Take their perfectly good paid off car, and trades it in for a brand new car and now they have a payment (guilty).
- After a raise, the person who room shares with some friends decides to get a 1 bedroom apartment on their own and increases their living expenses by $1,000.
- Your friend who purchases a brand new iPhone every year.
- That co-worker who complains about student loans, but goes out every weekend and buys the $7 beers
- Spend 50% of their salary on their home
- Spend another 30% on their cars
- Save less then 3% per year
And while there is nothing wrong with spending your hard-earned dollars on something that makes you happy, there is something wrong with not having financial priorities with the more money you earn!
Real Life, Lifestyle Inflation:
I once heard a very wealthy man say this:
“People who make more money struggle financially like everyone else, they just do so at a higher level.”
He went on to say that the only real difference between median-income earners and high income earns is Formica countertops and granite countertops.
And while this individual was semi-joking, he wasn't that far off from the truth. Case in point, mega earning cities like Washington, D.C.
In Washington D.C. for example, statistically, it and the surrounding areas is one of the wealthiest as far as income goes in the country. In fact, five suburban counties around DC rank in the top 10 wealthiest counties in the country, year after year.
Yet somehow, consumer debt in the DC area ranks in the top 5 nationwide, coming in at $4 trillion, even with the high incomes. But how could this be possible?
The very simple answer is lifestyle inflation.
Lifestyle inflation is one of a few reasons why roughly 80% of Americans live paycheck to paycheck. And even the biggest of earners, those in the top 10%, can and do fall victim to lifestyle inflation!
Many of those top earners have very little in savings to show for their large incomes mostly do to lavish lifestyles that are afforded by bigger pockets and more discretionary income.
Most are not able to retire comfortably and suffer from a multitude of financial issues such as financial stress and hardships. This is why knowing what lifestyle inflation is one thing, but taking action to curb it is essential!
5 Ways to Help Curb Lifestyle Inflation
1. Create some financial discipline.
In most cases, we inherit our money spending traits from our parents. Sometimes, because of this, the work hard /plays hard mantra can get the best of us, especially when we jump in earning.
Recognizing the fact that just because you earn more, doesn't mean you get to spend more. Start setting priorities for your raises that revolve around financial goals and not stuff.
For example, start telling yourself:
- “With my next raise, I am going to pay off all the credit cards”
- “I am going to make sure I am saving 25% of my income”
- “I always pay myself first!”
As weird as it may seem, by saying what you're going to do with your money you will begin to create some financial discipline! #2 will help you with lifestyle inflation too…
2. Have a realistic budget.
Seeing the big picture and thinking long term isn't always easy, but it's vital for financial success.
Long term thinking along with delaying gratification are two of the key principles is making sure you have enough money in the long run for things like travel and retirement.
Going back to lifestyle inflation, sure, you might make good money, but what do you have to show for it?
In order to help you curb your lifestyle inflation, you need a REAL budget. Follow these general guidelines for your budget:
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Bringing awareness to your spending is vital to ensuring you avoid lifestyle inflation. Once you setup your budget, make sure you monitor it and track it with Personal Capital, Mint, or these Mint alternatives!
My personal favorite is Personal Capital, which lets me watch our net worth grow while keeping track of our finances. This helps us stay motivated and avoid lifestyle inflation.
3. Stop valuing stuff and money, value memories
Next time you catch up with some long lost friends, see if any of them say, “You remember that one time I bought that awesome car?”
Chances are it won't happen. Instead, most of your time will be spent catching up and reflecting on past memories and experiences. In order to help curb lifestyle inflation, place memories and experiences first.
One of the quickest ways to stop buyer's remorse is to categorize spending into memories or stuff. Most never have remorse over a fond and enjoyable memory. In order to help you avoid lifestyle inflation, recognizing that stuff won't really do much in the happiness area will help you!
4. Save your money first.
Call it reverse budgeting, pay yourself first, or just saving money – at the end of the day if you want to stop lifestyle inflation, save at least 15% of your income prior to spending it.
A simple way to do this?
Automate your savings so you can mentally pretend that 15% of your net income doesn't even exist.
Take your check and set it up so that 15% of what you make automatically goes towards retirement contributions or investments. Getting that free pre-tax match at work is a great place to start!
After the 401K match, there are plenty of options out there when it comes to paying yourself first, depending on your situation a few apps that helpful include:
- Acorns – invests spare change
- Qoins – takes spare change to pay off debt
- M1 Invest – automatically invest your money
Regardless if you decide to pay off your debt or just save, just make sure at a bare minimum you have a goal to save 15%. If you're only at 5%, make a goal to gradually increase your contributions 1% per month.
Not only will this help you stop lifestyle inflation, you will feel better about yourself when you do spend money knowing you saved first!
>> See also; How Much Should You Have Saved by Age
5. Stop comparing yourself
It is a natural human tendency to compare ourselves to others. We find ourselves saying things like, “I wish I was as,” and insert whatever comes next.
Not only do we compare ourselves, but we also tend to compare our worst traits to someone else's best trait. While we can't necessarily control all of our physical features or cognitive abilities, we can control our lifestyle.
In other words, we can control financial comparison.
If you find yourself trying to keep up with others – vacations, new homes, heck – even having kids – well then you are making it harder on yourself.
- You will never keep up with everyone.
- Trying to keep up with everyone will make you stressed
- You can't live below your means
With social media, it is hard to not compare ourselves. Let's be honest, you are at work, you hop on Facebook and what do you see… someone at the beach. You are sitting at work, they're at the beach, how do you feel?
Knowing that, one quick way to help your lifestyle inflation is to actually set limits on your social media accounts. Tips for limiting social media include:
- Installing “Waste No Time” extension on your computer
- Deleting apps from your phone
- Having social media limits with phone use
Bonus: Delay Gratification Instead of Inflation
While limiting social media can help you stop comparing and curb lifestyle inflation, the magical ingredient might be some good ol' fashioned delayed gratification.
Learning to say no, ending your comparison and living on a budget will help you avoid lifestyle creep. But the often-overlooked magical secret is just delaying the good.
Sure, you can probably get the new car and with enough clever rationalization you can even figure out how to get the house that really just doesn't fit the 30% budget. However, what if you instead saved a little longer, delayed a little more and stopped caring so much what others thought?
What if instead, you said to yourself, “I can afford the house, but I know the financial stress it might come with won't be worth it.”
Challenge yourself to live differently now, avoid lifestyle inflation and you will be glad you did 5-10-20 and even 40 years down the road!! Your future self will be glad you did!
Question: Why do you think lifestyle inflation is so prominent?
Josh writes about ways to make money, pay off debt, and improve yourself. After paying off $300,000 in student loans with his wife in less than five years, Josh started Money Life Wax and has been featured on Forbes, Business Insider, Huffington Post, and many more! In addition to being a life-long entrepreneur, Josh and his wife enjoy spending time with their newborn son, their chocolate lab named Morgan, working out, being outside, traveling, and helping others with their finances! In case you were wondering, Josh uses Personal Capital to track his net worth and his first investment account ever was an Acorns account 😎