You may have seen the term lifestyle inflation floating around finance media and blogs. In simple terms, it refers to an increase in spending when your income increases. Typically, it tends to be a trait of those of us in our twenties who have been frugal and lived on little during years of study. Suddenly, after securing employment more money than ever is coming in. However, it can affect all manner of households. More money equals more problems, and after every raise, spending follows suit.
Getting caught up
Anybody can get wrapped up in lifestyle inflation. After all, we’ve received a rise or a bonus, we deserve this holiday. However, if you’re in a cycle of spending near enough any extra money you make it’s hard to get ahead financially. This makes it perpetually difficult to save for a property deposit or fund retirement and many people can get into debt they can’t escape.
A habit of purchasing big ticket items or treating yourself to smaller luxuries because you ‘deserve’ them, enable wants to become needs or necessities. Before long, two holidays abroad a year is a must, a shopping spree a month is a must. Before long, spending has increased significantly and living pay check to pay check, to keep this new lifestyle alive, is the norm.
How to help avoid lifestyle inflation
Ultimately, we are responsible for our bad spending habits. However, who can blame us for indulging in things we once couldn’t have? Getting the balance right between a few little luxuries whilst remaining debt free and saving is difficult. However, you may find the following strategies helpful if you have fallen foul of lifestyle inflation…
- Whilst a pay rise may seem substantial, determine how much extra money per month it provides you after taxes, student loan and pension deductions – it may not be as large as you think once you have done the maths.
- Invest in experiences as opposed to expensive clothes, cars or unnecessary household spends such as hot tubs or cinema rooms.
- Celebrate rises and bonuses modestly and keep an eye on your finances following a change in income.
Can we blame lifestyle inflation?
No matter how much we believe we our happy with our lot, none of us are going to shun a bonus or rise. More money can make things easier and, whilst an increased wage doesn’t equal happiness, being able to be slightly more relaxed with money does take some financial pressure off.
Instead of increasing your lifestyle goals when your income grows, why not up your savings to your financial goals? Use the extra income to pay off debts, top up your emergency savings or to put in the new house kitty. In the wise words of Charles Jaffe, “It’s not your salary that makes you rich, it’s your spending habits.”