Keeping Lifestyle Inflation at Bay

One of the biggest challenges that people face when it comes to personal finance success is lifestyle inflation. It’s a subtle thing that people often just take on without even really noticing or thinking about it, but then it turns out to be a vicious enemy of their financial goals.

What Is Lifestyle Inflation?

Lifestyle inflation simply refers to an increase in spending in response to an increase in income. Whenever a person starts bringing home more money and then, because of that increased income, they start spending more by buying a nicer car, buying more gadgets, and so on, they’re undergoing lifestyle inflation.

Let’s say, for example, that you get a raise that causes you to bring home $100 more a month. If the presence of that raise causes you, during your next car purchase, to buy a Lexus instead of a Toyota and take on a car payment that’s $100 more per month than you would have otherwise had, then you’re experiencing lifestyle inflation. You’re locking in a higher level of monthly expenses to enjoy a (theoretically) more luxurious lifestyle.

So, why is that problematic? After all, what’s the point of earning more money if you can’t have better stuff?

For starters, more income usually doesn’t mean more happiness. That is, additional income above a relatively low level (around $40,000 a year in the US, depending on the specific study) doesn’t make you happier over the long run. I discussed this in detail

in an earlier post, showing these income levels above which happiness doesn’t increase as suggested by different studies (they tend to range from $40,000 to $75,000 in household income). So, if you’re already making a good salary, more income is not going to translate into more happiness no matter how you use it.

The other major problem is that lifestyle inflation takes away from handling long term personal finance goals like financial independence. If you take a raise and start spending all of it now, that means you’re not preserving any of it to spend later on. You’re not bringing retirement any closer. You’re not moving toward debt freedom. You’re simply not moving toward any financial goals.

My Own Experience with Lifestyle Inflation

In 2002, I started my first “good” job after graduating from college. I went from working twenty hours a week for a bit more than minimum wage to working at a full-time salaried position earning about $40,000 per year. That was a huge jump in income.

There were many, many things that I wanted throughout my college years that I had denied myself because I didn’t have the money. I had built up some real debt during those years as well, with books and clothes and food often purchased with credit as well as some serious student loans during the final two years of college.

So, when that income started rolling in, I bought some things. I bought a new pickup truck. I bought a ton of electronics. I bought a professional wardrobe. I bought pallets of DVDs and books. Sarah and I had a two week honeymoon in the United Kingdom that included several days in an amazing hotel that overlooked Hyde Park.

What I didn’t do is get rid of that college debt. What I didn’t do is save a lot for retirement (I did save some, but not nearly as much as I could have or should have). What I didn’t do is think about anything beyond the next few months.

A few years later, Sarah and I were financially tapped out. It was a four year period of negative financial progress.

Of all of those things that I spent money on during those years, very little of it means anything at all to me today. I don’t really regret the honeymoon, but virtually everything else has no meaning in my life. I regret 99% of my excess expenses during those years because they contributed little value to my life but they certainly cost me a lot of money, time, energy, and stress over the years.

Battling Lifestyle Inflation: Ten Strategies

How do you conquer lifestyle inflation? Here are ten strategies that have actually worked well for me.

Strategy 1: Have Big, Meaningful Long-Term Goals

Where do you want to be in five years? Ten years? Twenty years?

This kind of future thinking can be hard, especially if your life isn’t on a certain path. Many people find themselves on uncertain paths where they don’t know how long their jobs will last or whether they even want to stay in that career path.

Here’s the trick. I’m not talking about where you think your life will be in five, ten, or twenty years. I’m talking about where you want your life to be in five, ten, or twenty years.

Let’s assume a few reasonable things go well over the ensuing years. What would you want your life to be like at that point?

That vision of your future defines a handful of long-term goals for you. All you need to do is compare that optimistic vision of your future with where you’re at now and then think about what you can do to make that transition happen. That’s a big meaningful long-term life goal. You’ve just defined it.

I actually go through this process regularly. I spend several hours on a weekend day roughly every three months thinking through my life goals and what I want to achieve. That way, the big goals never become stale.

Strategy 2: Keep Those Goals Front and Center

The real challenge of big goals is that they sometimes aren’t relevant to what’s going on in our day-to-day lives.

If you’re anything like me, your daily calendar and to-do list is frightening. My to-do list, right now, has somewhere around 70 things on it (I use prioritization, thank goodness). My calendar has scheduled events every single day through the end of the month and well into next month. That’s just reality.

A big long-term goal that’s not directly related to those day-to-day things can seem really abstract and easy to forget. It is vital that when you come up with ways to connect those big goals with your day-to-day life.

I find two elements really make this click.

First, I load my life with visual reminders of those goals. I choose desktop pictures for my computer and phone related to those goals. I hang pictures related to those goals in my office. They’re in my car. They’re on the fridge. They’re everywhere. They keep my big goals in my mind constantly.

Second, I break down those goals into something I can actually do every day to move toward that goal. For example, if my vision of myself in five years shows me looking thin, I would put an exercise session or a very low-cal lunch on my to-do list for the day. Checking off that to-do not only feels like I’m achieving something today, it also has that extra benefit of feeling like I’m progressing toward my big goal. It’s also a reminder of that big goal.

Strategy 3: Save Your Raises

Whenever you see a bump in income, it can feel really good to see that bigger paycheck. When you have that bigger paycheck, though, it can become really tempting to spend that extra money.

How about instead of seeing that extra paycheck, you simply never allow it to cross the threshold of your checking account?

Let’s say you receive a 3% raise. Bump up your retirement savings by that same number – from 3% to 6%, for example. That way, your paycheck will barely change, but you’ll be doubling your retirement savings.

On the other hand, you might just set up an automatic transfer from your checking account to your savings account for the amount of your raise so that it just disappears into savings not long after it appears in your checking.

Your raise, in other words, goes purely toward your long-term goals rather than toward whatever your short-term desires are.

Strategy 4: Recognize That Stuff Rarely Buys Lasting Happiness

The more I evaluate life, the more I see the Pareto principle popping up again and again. For those unfamiliar, the Pareto principle states that, for many events, roughly 80% of the effects come from 20% of the causes. It shows up again and again and again throughout life.

The idea that stuff doesn’t buy lasting happiness is a great example of the Pareto principle. Think about it: 80% of the pleasure you get from your possessions comes from 20% of your possessions. Most of your possessions provide very little pleasure in your life.

Think about all of the stuff jammed in your closet that you never look at. Think about the stuff on your bookshelves that you never deal with. What about the stuff in your cupboard that you never use?

When I think back on the vacations I took in my life, most of them were pretty forgettable. There were high spots during them, of course, but most of those high spots could have occurred on a camping vacation within a few hundred miles of home.

Again and again, I find that spending money does not buy lasting happiness most of the time. I find lasting happiness from personal relationships and from building my own skills and from activities using a pretty small proportion of my possessions. Buying new stuff or investing a ton of money into new experiences rarely adds up to being “worth it.”

Strategy 5: Be Mindful of the Costs When Evaluating What Others Have

Jealousy is a dangerous thing. It can create material desires out of nowhere, making you really want things that wouldn’t have crossed your mind otherwise. You see what other people have… and you really want it, too.

The problem is that when we see what other people have, we don’t immediately balance it out with what it cost those people.

Here’s an example: a wonderful couple I know is currently honeymooning in the tropics. Their honeymoon sounds amazing. I’d love to do that with Sarah and – I admit – I’m just a touch jealous of their trip. It just sounds incredible.

However, when I sit down and start pricing out a trip like that, I begin to see the reality. They are spending many thousands of dollars on the trip. That’s a hefty expense. Their trip may be wonderful, but it’s going to have a lasting negative impact on their finances going forward.

That doesn’t make the trip bad, per se, but it does make it seem like much more of a balance of factors rather than just an awesome good thing.

Whenever you feel a pang of jealousy for something that someone else has or is experiencing, think for a moment about what that possession or experience is costing them and how it’s denying them other opportunities and freedoms. This cuts through my jealousy and desire like a hot knife through butter.

Strategy 6: Maintain a Family Budget

A family budget is a simple plan that describes how all of your family income is spent. Some is spent on this category, some is spent on this other category, some is used for food, some is used for gas, and so on. (I use You Need a Budget to manage my own family’s budget.)

A budget is useful because it requires that you keep track of and figure out where every single dollar coming into your life goes. If you track your expenses and keep them separated into the budget categories, you can see how things are really going.

A budget is particularly useful when your income level changes because now you have the ability to expand the budgetary areas of your choosing. Will you crank up the “debt repayment” category? If you do, then you’ll be making bigger debt payments each month, which means that debt will vanish faster than ever. Maybe it will go into “Roth IRA” or some other category.

Regardless, a budget gives you a framework to make sensible decisions about that extra money. You don’t just rely on intuition and desire when you have a budget.

Strategy 7: Budget for Personal Expenses

Watching your new, higher income disappear into budget categories that don’t spell out any pleasures in your life can be kind of disheartening. All of us like to have a little bit of pocket money, after all, and when a raise comes through, that lack of pocket money can feel particularly disheartening.

My solution for this problem is to simply have a line in the budget for “pocket money.” I budget a certain amount each month for both Sarah and myself to be able to spend without consequence, knowing that our budget is well taken care of.

If you get a raise and really want to reward yourself, raise that “personal expenses” line on your budget by $10 or so. In other words, you’re allowing yourself a bit of nonspecific lifestyle inflation, but you’re also planning so that most of the money is going toward your bigger goals.

For me, simply having that “personal expenses” line is enough. I have enough to spend each month. I don’t need to spend more than that, so it’s quite easy to apply a raise to other expenses.

Strategy 8: Choose Substance Over Style

Many of the elements of “lifestyle inflation” that people buy into are examples of style over substance. Expensive clothes. An expensive car. An expensive home.

Most of the time, that additional expense doesn’t really add anything to the function of those items. It doesn’t buy warmer clothes – it just buys flashier clothes. It doesn’t buy a house that does any better at keeping you warm or keeping you dry. The car you already have gets you from point A to point B; the extra expense is mostly just flashiness.

When it comes to your major expenses, focus on substance instead of style. What do you need your home to do for you? What do you need your car to do for you? What does this more expensive option really add to that? Is that difference worth the expense?

When you stick with substance over style, you always have what you need. When you choose style over substance, you often find yourself without that stable foundation.

Strategy 9: Build Friendships With People That Have Similar (or Lesser) Budgets and Philosophies

When you hang out with people, what do they talk about? What are they proud of?

Do they talk about the new stuff they covet? The hot new restaurant they visited? The expensive new thing they now own?

Or do they talk about their life goals? Do they talk about events and activities that don’t require purchases? Do they talk about philosophy and ideas? Do they talk about staying within their budget and their financial choices that gear toward savings?

One group of friends is going to push you toward lifestyle inflation. The other will naturally push you away from it.

I’ve had circles of friends of both types. When I hung out with the first circle, we were in the worst throes of lifestyle inflation. Today, our circle of friends is much like the second example and our lifestyle has deflated, if anything.

Having trouble cultivating more down-to-earth friends? Look for activities in the community that might attract such people in a social way. Check out book clubs that are hosted by your library or spend time at volunteer activities in your community.

Strategy 10: “Test Drive” Lifestyle Upgrades (and See If They Bring Lasting Joy)

Even after all of these steps, you might be convinced that certain lifestyle upgrades are still the right thing for you. If that’s the case, try taking baby steps instead of giant leaps.

One method of doing this is to look at all of the things that you might be buying or replacing over the next year or so. Across all of those purchases, think about the one or two features that you wouldn’t ordinarily buy that might really matter to you. For example, you might decide that of all of the things you can upgrade in your life, a bigger data plan might provide the biggest impact. Then, just upgrade that one thing and hold back on the others.

This borrows from the Pareto principle mentioned earlier. 20% of the upgrades you pay for will bring you 80% of the value. So, spend some time trying to figure out what that 20% is.

Another method – one that works well if you’re already budgeting – is to “pretend” you have a fatter bill for a while. For example, imagine you’re thinking about moving to a bigger apartment or even renting a house. Your current rent is $500 a month, but the place you’re eyeing is in the $900 a month range. Spend a few months trying out what it’s like to have a $900 a month rent by paying your $500 a month in rent and then putting the other $400 into a savings account and not touching it. If you can get by just fine with that higher rent, make the move. (Plus, you’ll have a thousand or two in savings at that point.)

A third tactic for trying out lifestyle upgrades is to simply comparison shop. Sometimes, by comparison shopping, you can find an opportunity for a lifestyle upgrade but find that it doesn’t cost any more than you already have. For example, a friend of mine recently switched cellular providers, which enabled him to get a better smart phone and a larger data plan for the same price he was already paying.

Final Thoughts

Lifestyle inflation is a sure way to prevent yourself from reaching your financial goals, whatever they may be. If you have big dreams for the future, yet you take your raises and you spend all of that money on short-term pleasures, what you’ll find is that those short term pleasures will almost entirely fade away but you won’t have that long-term goal either.

Being aware of lifestyle inflation is just the first step. Take actions to keep lifestyle inflation from damaging the big dreams you have for the future. You’ll be glad you did.

Trent Hamm

Founder & Columnist

Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.