One of the biggest challenges that people face when they have a leap forward in their careers is that of lifestyle inflation. It might not seem like a problem at first glance, but it’s incredibly pernicious.
Let’s back up for a minute. Lifestyle inflation simply means an increase in one’s spending as a result of an increase in one’s income. If you’re making $40,000 a year and spending all of it, and then you’re suddenly making $60,000 a year thanks to a raise or a promotion and your spending goes up, you’re engaging in lifestyle inflation.
There are a couple of big problems with lifestyle inflation.
First of all, it’s very hard to undo. Lifestyle deflation is very difficult for most people. Once you’re accustomed to spending a certain amount, cutting back on that level can be quite hard. Thus, when you inflate your spending to match your new income level, you’re somewhat “locking in” to having that income level going forward. This restricts your career mobility greatly and makes the threat of losing your job much more frightening.
The other problem with lifestyle inflation is that it cuts into the money you’re contributing to lifelong goals, like retiring early or paying for your child’s education or starting a small business or making a radical career leap. If you inflate your lifestyle, suddenly you’re unable to save adequately for those goals because that money is going to “lifestyle expenses.”
A third problem – though a much more subtle one – is that many avenues of lifestyle inflation aren’t very fulfilling. It’s been found in study after study that income above roughly the average American household income doesn’t increase happiness. The reason? Once you have your basic life needs taken care of, happiness comes from within. You can’t buy happiness once you have your basic food, shelter, clothing, warmth, and security taken care of.
What can a person do to keep lifestyle inflation in check? I’ve found twelve strategies that genuinely work for me.
Strategy #1 – Clearly Define Your Life Goals and Your Idea of Success in Life
What do you want to do with your life? What genuinely makes you happy and brings you peace over a long period of time – not just a burst of joy from buying something, but lasting happiness?
Those are big questions, but they’re important ones. Without some idea of what you want from your life and from your future, it becomes incredibly easy to just wander through your days, accepting whatever may come, and lifestyle inflation becomes natural.
The problem with that is twofold. First of all, everyone experiences some degree of setback and decline as they age, and if you’re not prepared for those things, they can hit you very hard, rendering your future a very difficult place. Second, without some sort of vision for the future that you’re working toward, it becomes nearly impossible to free oneself completely from the need to earn a strong income, which inherently cuts off a lot of life’s possibilities.
The key to achieving both of those goals – protection against the unforeseen and the inevitable challenges of old ages, and the possibility of grand ambitions – is to spend significantly less than you earn and keep lifestyle inflation in check.
It starts with that vision of the future, though. It starts with envisioning the kind of life you’ve always wanted to lead – free from the demands of working for money with your health intact and all sorts of possibilities before you. That vision is a personal inspiration, one that you can constantly tap when motivation is needed.
My vision, the one I tap all the time when I’m struggling with this, is simple. I imagine Sarah and I in our fifties, traveling about America in a car and spending weeks camping at each national park, visiting our children and grandchildren along the way. I imagine writing a novel and doing it the way I want to do it, taking the time that needs, without any sort of financial or time pressure on my shoulders. I tap this vision all the time when I want inspiration, and particularly whenever I’m thinking about some form of lifestyle inflation.
What’s your vision? What would you like your future to be like? Hold onto that vision and make sure it doesn’t drown in forgotten expensive meals and a house bigger than you need.
Strategy #2 – Set Short-Term and Medium-Term Financial Goals in Line with Your Lifetime Goals
Once you have some long term goals established, start translating them into medium term and short term goals.
I wrote out my long term vision above. What can I do this year to make sure that it comes true? Then, what can I do this week to make sure that my year-long vision comes true? Then, what can I do today to make sure that my vision of the week comes true?
Keep asking yourself those questions, over and over again. What you’ll find, if you do that, is that you end up finding really worthwhile things to do with your money that are really in line with what you want most in life. The same is true for your time – you find really useful things to do with it.
Almost all of the time and money I spend feels purposeful at this point in my life. I’m not being facetious when I write this. However, I had to invest a lot of time thinking about what I wanted out of life and then I had to invest a lot of time thinking about how that translated into what I’m going to do today.
I want a great relationship with my wife and kids? I work on that today. I want financial independence before I’m too old to enjoy it? I work on that today by keeping my spending in check and not inflating my lifestyle. I want to be healthy and fit? I work on that today.
If you have a good grip on what you want out of life and how that translates to your actions today, you’ll find that there’s almost always something purposeful you can be doing with your money and your time. When that happens, you’ve elevated the value and temptation of doing things for the long term. The trick, then, is to put the short term temptations in check, which is what most of the rest of this article covers.
Strategy #3 – Automatically Transfer Your Raise Before You Can Touch It
If you get a raise at work, do something automatic with it. Increase your retirement contributions. Set up an automatic extra debt payment. Set up an automatic transfer into a savings account so that you have an emergency fund. Set up a 529 college savings plan for your kids and automatically transfer the raise into that.
The goal is to sweep the extra money you would take home into a lockbox for your future. The lockbox itself depends on what your goals are. Choose one that’s in line with your life goals and throw that money in there.
When you get your first paycheck after the raise, see how much it went up, then set up that automatic transfer so that the money is scooped out of checking automatically a few days after your paycheck arrives – or, even better, have it taken directly out of your paycheck so you never have a chance to spend it.
By doing this, not only are you funding your long term goals directly, you’re also ensuring that lifestyle inflation doesn’t happen because the actual money in your checking account doesn’t change.
In fact, this is a great tool to use if you get a very large raise. You can quickly go from a 0% savings rate to a 40% or 50% savings rate, and you can use that money to quickly decimate your debts, build an emergency fund, and start saving for financial independence at an incredibly fast rate.
Strategy #4 – Avoid Debt
Debt is a perfect example of living beyond one’s means. It means that you made a purchase that you could not afford. Afterwards, you have to use future income to pay for that purchase you made in the present. That is a prime example of lifestyle inflation, because debt virtually always means that you’re living beyond your income level.
Going forward, do all that you can to avoid debt. The only exception to this is a situation where a mortgage can result in little or no increase to your housing costs (while slowly building equity), a student loan that’s intended to put you in a position to rapidly increase your earnings, or a minimal car loan if that’s the only way you can get to work. Any debt beyond that is an example of lifestyle inflation.
The worst of all is credit card debt. Typically, credit card debt occurs when a person is either buying unnecessary things that he or she currently cannot afford – purely living beyond one’s means – or they’re buying necessary things because they’ve bought unnecessary things in the past. Credit cards also comes with a high interest rate, which further drains your financial resources. If you’re using a credit card as anything more than a tool of convenience where you pay off the balance in full each month, you’re living beyond your means.
Strategy #5 – Make Debt Payoff a Top Priority
What do you do if you have debt already? In that situation, when your pay goes up, you should make paying off that debt a top priority, especially if it is high interest debt (which I personally define as anything with an interest rate over 7%).
One solid approach to this problem is to use the “automatic withdrawal” strategy suggested earlier in this article. After your income goes up, figure out how much your paycheck has gone up and then make an extra payment in that amount each pay period on your debts.
When I was actively eliminating debt, I found it very useful to have a portion of my paycheck automatically transferred out of my checking account into savings, from which I regularly made extra debt payments as needed. I did not want to fully automate those debt payments to avoid over drafting and extra payments, but I also wanted that money out of my checking account so there was zero temptation to spend it on lifestyle inflation.
There are a multitude of advantages to paying off debt. The big one, obviously, is that your money is no longer being siphoned away from you in the form of interest. However, I consider the improvement in cash flow to be almost as important for most people.
When a debt is eliminated, you’re no longer responsible for that minimum payment each month, which means that your baseline of bills that you have to cover each month goes down. If your minimum amount that you have to spend each month goes down, you have even more financial flexibility – you can accelerate your savings for future goals and make that far-off dream a reality even sooner than before. Plus, if something does go wrong, having no debts means that it’s easier to make ends meet in a pinch.
Strategy #6 – Don’t Repeat Splurges with Any Frequency
One of the big traps of lifestyle inflation is the “repeated splurge.”
Let’s say there’s some particular treat that you like. Maybe you like to go to the bookstore to buy books. Maybe you like going to the coffee shop. Maybe you like going to the movies, or eating out.
Whatever it is, when your income is low, you can’t do it very often. It’s a splurge and thus it feels special. You enjoy it and look forward to it and thus the good feelings it brings multiply in your head.
When your income goes up, it’s very tempting to start indulging in that splurge more frequently. The problem is that as soon as a special splurge becomes a more regular thing, it stops being special and becomes completely ordinary. You adapt. Something you used to think was a great treat and something to really savor is now just the ordinary boring baseline of life… except now the ordinary baseline of life is far more expensive than it used to be. You’re not any happier – you’re just spending a lot more and you’ve lost something that used to be a treat.
Here’s the secret to solving that: don’t let a special treat become a regular routine. If there’s something you really enjoy and appreciate as an occasional splurge, leave it that way. Don’t increase the frequency just because you can afford to. Not only is that more expensive, but then that treat loses what makes it special and it just becomes a more expensive version of ordinary.
If you go to a coffee shop once a month as a treat, leave it that way, even if you’re making a lot more money. If you turn it into a twice a week thing, it’ll stop feeling nearly as special and you’ll pay out the nose for the opportunity for it to no longer feel special.
Strategy #7 – Create (and Stick With) a Splurge Budget
One really useful strategy I’ve found for keeping my splurges in check is that I have a “hobby/splurge budget” each month. I have a certain cap that I can spend on all of my hobby expenses and other splurges.
If I want to buy a board game, it comes out of that budget. If I want to buy a book, it comes out of that budget. If I want to buy a latte at the coffee shop, it comes out of that budget.
The thing is, even if my income goes up, that budget stays the same. It’s increased exactly once over the last decade, and that increase was just to keep pace with price inflation. Even as my income has changed, that budget amount has stayed the same.
This budgeting strategy makes it quite easy to avoid inflating one’s lifestyle through smaller expenses.
Strategy #8 – Kill the “Deserve” Question
One aspect of lifestyle inflation that can be tricky to overcome is the sense that you “deserve” some sort of perk or another.
I deserve this expensive car. I deserve this expensive trip. I deserve these expensive treats.
There are a number of things happening all at the same time here and none of them are good for your finances. One big element is that there’s often marketing at work. Advertisements often use that exact language to prey upon people’s sense of self worth in an attempt to tie it to a product.
The thing to keep in mind is that there are always going to be fruits from your hard work and effort and talent. The question is what do you want those rewards to be? Do you want freedom from any form of financial stress? Do you want the ability to completely chart your own professional path without financial worries forcing you into areas you don’t want to go? Or do you “deserve” a car that will be in bad shape in several years? Your money can go to one or the other.
The thing to remember is this: you might believe that you deserve some splurge, but you also deserve to have financial security and a more peaceful life and a professional life without stress and the opportunity to chart your own path. If you decide that you deserve the splurge more, you sacrifice the other things you deserve. Choose wisely.
Strategy #9 – Carefully Research All Significant Purchases
One sign that you might be undergoing lifestyle inflation is that you’re engaging in a sequence of expensive purchases. Maybe you’re replacing a car, going on an expensive trip, and doing some home improvement in short order while also eating out a lot more than you used to.
One solid approach for keeping the lifestyle inflation in check is to simply slow things down and adequately research each major purchase.
Rather than rushing to the car dealership to buy a car just because you feel like the time is right for a car replacement, spend some time carefully researching that car. What kind of car do you actually need? What features must it have? What makes and models are recommended for that type of car? What manufacturers have a good reputation? What model years meet your needs? Once you’ve done that homework, start looking at lots of local dealerships for automobiles that might match your requirements. Go there and play hardball – you know exactly what you want and what price you’re willing to pay for it and don’t be afraid to walk away if you don’t get it.
This process will take some time, but when you’re done, you’ll have the car you want that actually matches your needs at the price that you want.
Then, repeat the same thing from the beginning with each significant purchase. Do it with travel. Do it with appliances. Do it with home improvement projects. Do it with gadgets.
Start by identifying exactly what you need from this purchase and what features are important to you. Research lots of options and figure out what options actually match up well with your needs. Then start looking at various retailers and what they might be able to offer in terms of price and features.
Along the way, keep asking yourself if this potential purchase is really necessary and whether you’re buying a more expensive model than necessary to fulfill relatively minor wants and desires rather than genuine needs.
Strategy #10 – Bump Up Your Retirement Contributions
If you’ve done all of the other steps here, one final tool to always consider is simply bumping up your retirement contributions significantly. Rather than bringing home more pay, just increase your contributions to your workplace retirement plan or to your own Roth IRA by the amount of your raise.
Provided that your basic day to day living needs are met, you will virtually never regret saving for retirement. You will always be glad that there is money sitting there waiting for you at the end of your career path.
If you get a 10% raise, bump up your retirement savings by an equal amount and forget about it. If you were contributing 5%, make it 15%. This basically means that your take-home pay will remain virtually unchanged, but your retirement savings will take off like a rocket.
Strategy #11 – Don’t “Inflate” Your Friendships
When people start earning more money and feeling as though they should be spending it, they often start to subtly spend more time with their friends who spend more and spend less time with those friends who are a bit more careful with their money. After all, if you’re suddenly eating out frequently, it’s easier to do it if you have friends who do that, too.
Be mindful of this change. Often, we spend out of a desire to match up with the behavior we see from the people we spend the most time with. If we spend a lot of time with people who eat out a lot, we’ll probably eat out a lot.
I personally find it very useful to consciously choose to spend time with friends that exhibit the kinds of behaviors and values I want to have in my own life. I want a life of financial independence and strong relationships with people I trust and respect and whose company I enjoy. I keep that in mind when I consider who I’m going to spend time with, who I’m going to invite over to my home, which invitations I will accept, and so on.
Strategy #12 – Find and Maintain a Repertoire of Free and Low Cost Things You Deeply Enjoy
I love to read. I love to play tabletop games. I love to cook. I love to practice taekwondo. I love to go on hikes. I love to meditate. I love to go on long walks. I love to listen to audiobooks and podcasts while I do household chores. I love to play soccer with my kids.
Those things have been true for a very long time and they still hold true today. Those things all bring me joy in my life and none of them are particularly expensive to engage in. Thus, I make a conscious effort to keep those activities as a major part of my life. I fill my spare time with them as much as possible.
“But what about trying new things?” I try lots of new things, but because I have a strong repertoire of things I know I already enjoy and value in my life, I’m careful with the new things I add to my life. I generally don’t try to add things that are going to have an ongoing cost or require lots of equipment or require a payment for participation. There are infinite things to do in the world, so why not filter out the things that take my life in a direction that I do not want?
Sarah and I live a lifestyle that costs substantially less than what we bring in. This is a conscious decision – rather than having an expensive lifestyle, we want a lifestyle that eventually builds into full financial independence so that we can do some of the things we’ve always been dreaming of doing, like spending six months driving around the country camping in national parks.
If you want to erase your debts, achieve financial security and eventual financial independence, and live a life of low financial stress, one of the most effective things you can possibly do is keep your lifestyle inflation in check. These strategies will help you do just that.