budget

Lifestyle Inflation: More Money, Same Problems

6 Minute Read

There’s a new villain in town, and it’s attacking the lower, middle and upper classes.

It’s called lifestyle inflation, and it doesn’t care how much money you make—it can still find you.

What Is Lifestyle Inflation?

Simply put, lifestyle inflation happens when you increase your household spending as your income grows. A little raise here, a bonus there and pretty soon your lifestyle begins to expand to match those zeros on your paycheck.

It’s easy to get caught up in lifestyle inflation. After all, you’ve earned that car upgrade, designer handbag and luxury vacation—right? Not so fast . . .

If you’re spending all the extra money you’re making, it’s nearly impossible to get ahead—no matter how much income you bring in.

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Lifestyle Inflation Can Affect Anyone

A 2017 GoBankingRates study found that 57% of Americans have less than $1,000 in their savings.(1) Shockingly, even families earning upwards of $500,000 a year can still end up with little to no savings.(2) Lifestyle inflation could be to blame for this lack of savings. With many people choosing to keep up appearances rather than stash money away for a rainy day, it’s easy to see how.

So, where is their money going instead? The common culprits are likely hefty mortgages and childcare costs, not to mention extras like vacations, fine dining, and a new wardrobe to match every season. But when your lifestyle is inflated, it can cause you to live paycheck to paycheck, to stay in debt, and to have little (if any) money left over to save for the future.

Millennials fresh out of college can fall into the trap of lifestyle inflation too. Thanks to their newfound jobs, they’re enjoying a regular income and the opportunity to eat something other than frozen pizza every day. But the next thing you know, they’ve given into the pressure to live 25 years ahead of their earnings by taking on a brand-new $20,000 car loan to match their $30,000 starting salary.

How to Avoid Lifestyle Inflation

Don’t take on new debt because you can “afford” it.

How many times have you heard someone say, “I just got a raise at work . . . now I can afford that new car (or furniture set or latest tech gadget etc.)”?

Newsflash: Just because you can “afford” the monthly payment on something does not mean you can truly afford to buy it. The interest alone could make you pay far more than the original sticker price.

Don’t try to keep up with the Joneses.

Just because your son’s friend is taking karate, art and horseback riding classes doesn’t mean your son needs to do it too. You’re still a good parent if your child’s only extracurricular activity is swim lessons at the community pool. Really!

Your neighbors might have gone on a 12-night European cruise, but that shouldn’t make your road trip or staycation any less enjoyable. It’s like Rachel Cruze says in her best-selling book Love Your Life, Not Theirs, “Too many people allow cultural expectations and other people to dictate their own values and family priorities.”

As if it isn’t hard enough to hear about these stories from neighbors, coworkers and friends, we now have a front-row seat to see it all too—thanks to social media. Scrolling through a news feed makes it easy to take a peek into someone else’s life and compare yourself to their highlight reel.

Don’t fall into the trap of letting the way others spend their money dictate the way you spend yours. The truth about the Joneses is that they’re probably broke and busy trying to keep up with someone else.

Do make a budget.

The key to winning with money is simple: Budget!

It’s important that you do a zero-based budget every month, before the month begins. Having a zero-based budget (where your income minus your expenses equals zero) can keep you from living beyond your means. With your budget in place, you’ll know exactly how much you can spend and keep lifestyle inflation at bay!

You might think a budget is restrictive, but it actually gives you permission to spend money . . . on those things you’ve already budgeted for, that is. And what happens when you want to make a purchase that isn’t in the budget?

Instead of relying on a credit card or loan to “afford” a splurge, stash away small amounts of cash over time. That way you can truly afford those lifestyle items you want. And you’ll be able to pay for them in cash!

Are you stumped on how much money to allocate for each budget category? We recommend you follow these percentages:

Category Percentage of Overall Spending
Giving 10–15%
Saving 10–15%
Housing 25–30%
Transportation 10–15%
Food 10–15%
Utilities 5–10%
Insurance 10–25%
Health 5–10%
Personal 10–15%
Recreation 5–10%

Leave Lifestyle Inflation Behind and Go After Your Goals!

Instead of increasing your lifestyle when your income grows, increase your contributions to your financial goals!

Throw that extra money at the smallest debt on your list (Baby Step 2), use it to build up your emergency savings (Baby Step 3), or put it toward paying off your home early (Baby Step 6).

Using that bump in pay toward your next Baby Step can set you up to win now and in the future. Getting out of debt means you’ll have even more money in your pocket (bye-bye monthly payments!). Then you can focus on saving, investing, and becoming a millionaire who isn’t even the slightest bit tempted by lifestyle inflation.

And yes, even successful millionaires need to live on a budget too.

If you’re ready to kick lifestyle inflation to the curb, start your first budget with our free app EveryDollar. You can create your first budget in as little as 10 minutes!

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