Six Ways to Squash Lifestyle Inflation

If you’re like many middle-class Americans, you’ve worked hard to get ahead and earn more money. And even if your progress is slow, you’re (hopefully) inching toward a salary you can be proud of.

But, even if that’s the case, you may have a problem. Just because you’re earning more doesn’t mean you’re building wealth. Due to rising costs of everything from healthcare to transportation, those extra wages may not stretch very far at all.

Then, there’s the other problem many of us deal with as our incomes rise – lifestyle inflation. In case you’ve never heard of the phenomenon, lifestyle inflation is a term used to describe an increase in spending that corresponds with an increase in earnings. So, you get a raise and earn a little more… and you allow yourself to spend a little more. And as you earn more, you spend more, and so on.

This constant drain on our money creeps up so slowly we hardly notice it’s there, yet it works against us constantly. Imagine earning more money every year, yet having nothing much to show for it. This is exactly how lifestyle inflation looks and feels.

Lifestyle Inflation in Action

Most of us experience some lifestyle inflation whether we want to admit it or not. And sure, some lifestyle inflation is good. I mean, the whole point of earning more money is improving our lives, right? With that in mind, it’s perfectly natural to want to:

  • move into a nicer home with a larger yard or better location
  • trade in your old beater for a newer car
  • quit wearing rags and finally buy new clothes for work

The broader issue with lifestyle inflation isn’t the important lifestyle investments you make; it’s the slow creep of unnecessary spending that doesn’t add value to your life.

Let’s say you earned a sweet 5% raise last year, felt flush with cash, and traded in your perfectly fine car for a nicer model that costs $100 more per month. Or perhaps you got the same raise, felt a little wiggle room in your bank account, and allowed yourself to spend considerably more going out with friends or coworkers each week.

Or maybe your youngest child finally graduated from preschool to kindergarten, freeing up $1,000 in cash every month. But instead of making sure that money goes to something tangible like a 529 plan or vacation fund, you leave it sloshing around in your checking account, where it’s repeatedly and easily squandered on food or random purchases.

Six Strategies to Stop Lifestyle Inflation in its Tracks

With any of those examples, earning more money won’t leave you better off. If you continue to spend, spend, and spend more as your income grows, you’ll never build up extra cash to save or invest.

If you work hard for your raises and want to make them count, recognizing lifestyle inflation – and squashing it – should be your goal. Here are six strategies that can help you maximize the money you work so hard to earn:

#1: Limit impulse purchases by holding yourself accountable.

Imagine receiving a raise and having an extra few hundred bucks to work with each month. If you didn’t have a plan for this money, you might be tempted to use a lot of it on last-minute splurges.

When you have extra money in your wallet, it’s easier to justify buying a new shirt at the mall, a new pair of heels you don’t need, or a new set of golf clubs. Unfortunately, those impulse purchases can eat away at your earning power, completely wiping out your “gains.”

According to financial advisor Anthony M. Montenegro of Blackmont Advisors, it’s far too easy to splurge when nobody’s watching. If you’re worried about wasting your raises, get an accountability partner, he says. When you’re tempted to spend on your own, “a spouse, friend, or financial advisor can help talk you off the ledge and encourage you toward achieving your savings goals.”

At the very least, don’t let your extra income linger in your checking account. By transferring extra cash to your savings account before you have a chance to spend it, you make impulse shopping that much harder.

#2: Set short- and long-term financial goals.

It’s easy to waste money when you’re not working toward a goal. That’s why many experts suggest setting a range of short-term and long-term financial goals, then creating specific plans to reach them.

Your goals can be anything, says personal finance expert Deacon Hayes of Well Kept Wallet. Do you want to retire early? Maybe you want to put your kids through college so they don’t drown in student loan debt later on. Perhaps you want to pay off your mortgage early to become completely debt-free.

Whatever your goal is, let that motivate you to say ‘no’ to the things in life that stand in your way. “It’s this constant focus on what you want to achieve that will give you the strength to live well within your means, so that you can have what matters most to you in life,” says Hayes.

#3: Know your income and expenses.

Washington financial advisor Alex Whitehouse of Whitehouse Wealth Management says far too many people don’t know how much they earn, what their expenses are, and how those two numbers relate. Unfortunately, not knowing these figures makes it far too easy for lifestyle inflation to take hold.

“Lifestyle inflation is particularly susceptible to those who don’t know their numbers,” says Whitehouse. “Without knowing, people overestimate their income and underestimate their expenses, which can easily lead to overspending.”

If you’re worried about lifestyle inflation, one of the best steps you can take is figuring out your exact income and your approximate monthly expenses. Compare the two numbers to figure out how much you could be saving every month. If your savings aren’t what they should be, track your spending to see where your money is going. While the truth can be painful, seeing your spending in black and white can be a strong motivator for change.

#4: Use a monthly budget.

If you want to make sure lifestyle inflation doesn’t stop you from getting ahead, a monthly budget might be exactly what you need. With a zero-sum budget, you compare your income and bills with the goal of giving every dollar “a job.” Since any extra cash you earn is factored into your zero-sum budget, there’s little opportunity for waste or lifestyle inflation.

If you’re not sold on a zero-sum budget, make sure to research other budgeting strategies that might suit your goals and lifestyle better. Whichever type of budget you choose, the underlying goal is the same: With a budget, you learn to distinguish needs from wants, eliminate waste, and prioritize your spending on what’s most important to you.

#5: Automate your finances.

If you’re worried you don’t have the willpower to make smart decisions with your increased earnings, automating your finances could help. As San Diego Financial Planner Taylor Schulte notes, you don’t need to make a budget or meticulously track every expense to save money. Once you automate your finances, all the hard work is done for you.

“Set up a process to automatically transfer money from your checking account into a savings or investment account regularly,” says Schulte. “With just a one-time setup, you’ve committed your future self to consistently save money. Thanks to automation, you can force yourself to save money and you don’t even have to think about it! You just set it and forget it.”

As your income grows, you can automate your savings and investments to grow along with it.

#6: Boost your retirement contributions with each raise.

You can even throw your raises directly into your work-sponsored retirement plan, notes Brian D. Behl, wealth advisor at Bronfman E.L. Rothschild. Even if you only allocate half of your raise to your 401(k) account, you’ll be doing yourself a huge favor.

“If someone receives a 4% raise, they can increase their retirement deferrals by 2% and still see a small increase in their take-home pay,” says Behl. “This helps prevent lifestyle inflation.”

The point behind automation is getting your extra funds out of sight and out of mind, so you’re less tempted to overspend. By boosting your retirement contributions, you’re putting your money to work and eliminating any temptation to spend in one fell swoop.

The Bottom Line

When it comes to building real, sustainable wealth, earning more money is only one piece of the puzzle. If you want to use those increased earnings to get ahead financially, you have to make your raises, windfalls, and savings count – and last beyond the next trip to the mall. While some lifestyle inflation is inevitable, you should strive to squash the type of lifestyle inflation that doesn’t add value to your life.

The best way to limit lifestyle inflation is to be proactive. Don’t wait until you’re earning more to figure out what to do with it. Create an ongoing plan to deal with “found money,” windfalls, and raises as they come.

When you tell your money what to do, it listens. And when you don’t, it disappears. By creating a plan for your growing income, you can ensure every dollar counts.

Holly Johnson is an award-winning personal finance writer and the author of Zero Down Your Debt. Johnson shares her obsession with frugality, budgeting, and travel at

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What do you do to limit lifestyle inflation? How do you make sure your annual raise doesn’t go to waste?

Holly Johnson

Contributing Writer

Holly Johnson is a frugality expert and award-winning writer who is obsessed with personal finance and getting the most out of life. A lifelong resident of Indiana, she enjoys gardening, reading, and traveling the world with her husband and two children. In addition to The Simple Dollar, Holly writes for well-known publications such as U.S. News & World Report Travel, PolicyGenius, Travel Pulse, and Frugal Travel Guy. Holly also owns Club Thrifty.