FINANCIAL FRESHMAN #014
TL;DR → Lifestyle inflation is when your spending increases due to an increase in your income. Following a 50:30:20 budget, pausing before making large purchases, and making a plan for any unexpected income can help reduce the negative impacts of lifestyle inflation.
What is Lifestyle Inflation?
Congratulations! You’ve finished college, and finally got your first paycheck from that well-paying job you landed. Next thing you know, the Civic in your driveway turns into a Rivian, your Timex watch turns into a Rolex, and your Sam’s Choice bottled water is replaced with $52/Gallon Ophora Hyper-Oxygenated water from Erewhon.
I’m embellishing, of course, but the phenomenon of lifestyle inflation is very real. Put simply, it’s when your spending increases along with your income. If you’re not careful, you could end up living paycheck-to-paycheck even if you earn a significant salary. Lifestyle inflation traps you in a cycle of continuous upgrades that leaves little room for savings or investments into your future.
Being mindful of this phenomenon alone will likely reap some benefit, but keep reading to learn three practical tips to keep lifestyle inflation at bay.
Tip #1: Mind Your 50:30:20
A number of budgeting best-practices are presented as ratios, such as the common 50:30:20 budget. This is a budget where:
- 50% of your money goes towards things you need
- 30% of your money goes towards things you want
- 20% of your money goes towards your savings
This is an effective approach to keep lifestyle inflation at bay, as it sets a boundary for any splurging on a monthly basis. This allows for your spending on “Wants” to increase, while also holding you accountable to your savings increasing at the same time.
Tip #2: Abandon Your Cart
If you have the money in your checking account, it can be tempting to pull the trigger on that new gadget or piece of clothing. A best-practice to keep lifestyle inflation at bay is to press pause on larger purchases, and first do some reflecting. Below are some questions that you could consider, depending on the purchase.
As a fringe benefit, abandoned cart emails are a common marketing practice deployed by a number of online retailers. Even if you’re positive that a purchase makes sense, you may end up with a 20% off coupon in your email inbox just for letting the item hang out in your cart overnight!
Tip #3: Plan for Windfalls
Receiving unexpected income can be really exciting, whether that be an unplanned bonus, raise, inheritance, or gift. Even if you budget your money very closely, funds that were truly unexpected are at risk of being spent more haphazardly than your other dollars.
Making a plan for these windfalls is a crucial strategy in managing your finances effectively. Instead of immediately making a large purchase, consider allocating a portion to savings or investments. For instance, you might decide to set aside 50% of any windfall to bolster your emergency fund, contribute to retirement accounts, or invest in opportunities that align with your financial goals.
This disciplined approach helps you resist the temptation of lifestyle inflation, allowing you to use unexpected income to build wealth and achieve long-term financial stability.
Final Thoughts
When I was a student, I had the misconception that earning a high income and being wealthy were synonymous. Unfortunately this is not the case, as the world is filled with high-earners that have no wealth to show for their lucrative careers. There can be a number of factors at play here, but lifestyle inflation is certainly one of them.
The next time your income increases in any way, remember this quote from The Millionaire Next Door by Thomas Stanley:
“If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend.”
