Lifestyle Inflation: How it Affects Your Budget

by Raptor Staff on October 12 2022

Most people create a budget and stick to it when just getting started on their financial journey. Over time, however, many succumb to a common phenomenon known as lifestyle inflation. Depending on your spending habits, lifestyle inflation can upend your carefully planned budget quickly or slowly over time.

So what is lifestyle inflation and how does affect your budget? Here’s what you need to know so you can take care not to fall into this trap.

Fancy car in upscale neighborhood.

What Is Lifestyle Inflation?

When your spending increases along with your income, it’s called lifestyle inflation. It’s very easy for this to happen.

You start out creating a budget that helps you align your expenses to your income. As long as your income stays at that level, you continue being careful about your expenses. Then, at some point, you get a raise or you take up a new job that pays more. Slowly you start to increase your spending to match your new higher income. It may sound like there’s nothing wrong with this as long as you’re not spending more than you earn. However, this does have long-term consequences.

The risks of falling victim to lifestyle inflation

It’s difficult to get ahead financially if you keep increasing your spending to match your higher earnings. With this cycle of lifestyle inflation, you likely won’t have any savings. Just trying to make ends meet can become challenging even though you’re earning more than before. Putting money down to buy your own home may remain an unattainable dream if you become a victim of lifestyle inflation. In the long run, this can lead to financial distress as you need to keep earning more to keep up your higher spending habits.

Additionally, the cost of living goes up every year, which means you need more money just to cover the basics. General inflation trends together with your own lifestyle inflation put you at high risk of getting into debt.

Avoiding lifestyle inflation

Ideally, you should to maintain a reasonable lifestyle budget regardless of how much your earnings increase. However, things happen. You may not realize you’ve started spending more after you got a raise. Or maybe you thought you deserved to celebrate your raise at least for a while. You had the best intentions of scaling down after a couple of months, but that didn’t happen. Fortunately, no matter where you are with regards to lifestyle inflation, there are things you can do to resolve the situation.

1. Track your spending

Being aware of your spending patterns is the first step to staying within a lifestyle budget. Create a spreadsheet and write down all major as well as minor expenses. A coffee and sandwich at the corner deli may only cost a couple of dollars but that can add up to a lot over time. No matter how small the expense, write it down. At the end of the month, you’ll get a pretty good idea of what you’re spending your money on.

Some of the entries on your spreadsheet will be non-negotiable. For example, you have to pay your rent every month. You also have to buy groceries, pay your utility bills and pay for transportation. But what about the others? Are there any expenses you can cut back on or eliminate altogether? Maybe you could cancel that cable subscription especially if you never find time to watch TV anyway. Or maybe you could keep aside a few hours every week to cook for the week instead of eating out or ordering in every day.

You don’t have to give up on everything but scaling back even a little can make a difference.

2. Commit to building your savings

You’ve saved some money by cutting back on unnecessary expenses. Now what? What are you going to do with that money? Keeping it at home isn’t helping. For one thing money doesn’t grow when you keep it in a drawer at home. Secondly, you’re more likely to feel tempted to take it and spend it on something completely unnecessary.

A better use of any money you save is to deposit it into a savings account at a bank. This money will attract interest every month, which will grow your savings over time.

One great habit you should start is to deposit a portion of your income to your savings account every month. In fact, you can set it up so a percentage of your income gets transferred directly to your savings account. That way you won’t be tempted to spend it. When you allocate a percentage of your income to savings, that amount increases as and when your pay increases. This is a definite way to stay ahead of lifestyle inflation. Try using a financial planner to help you create a savings plan.

3. Save up for non-urgent big purchases

Want to buy a bigger vehicle, upgrade your refrigerator or go on a cruise? Don’t use your credit card or dip into your savings. Keep those purchasing avenues for emergencies such as urgent medical treatment or having to fix your vehicle. For other non-urgent big purchases, start saving up specifically for that purpose. You can do this by cutting back even more on non-essential expenses on your track sheet. If you can’t cut back any more, consider taking up a side-hustle to add to your income. Keep that money aside for your big purchase.

Refraining from dipping into your savings will help you avoid lifestyle inflation.

4. Keep your long-term financial goals top of mind

Keeping your long-term financial goals in mind will help you resist the temptation to splurge on unnecessary purchases. Maybe your long-term goal is to buy your own house someday. Buying that luxurious but unnecessary high-ticket item will prevent you from reaching your goal anytime soon. The longer you delay, the more the price of real estate rises and the further away you’ll be from reaching your goal.

The only way to reach your financial goals, whatever they may be, is to be ever vigilant not to fall into the trap of lifestyle inflation.

We hoped you enjoyed this article! Remember, you can and potentially lower your monthly student loan payments and save money.