Prevent Lifestyle Inflation with these Easy Steps

Lifestyle inflation. We’ve all done it or know someone who has done it.

We have a new, better paying job or received a promotion with a little added cash to our paycheck.

Or, maybe it seems like everyone is sporting that hot new item or going on an adventure in a faraway land. And, we feel like we need to do that too.  

What happens?

We end up buying something we’ve never purchased before. We’re not talking about that one-time splurge but consistently spending more money on items and experiences that we previously did not, also known as lifestyle inflation. 

Lifestyle inflation tends to happen when either we receive an increase in income or attempt to make similar purchases as our peers (i.e. keeping up with the Joneses). 

We either feel like we can now afford a new level of “living” or as social creatures, we make purchases to fit in and be apart of the in-group. 

That’s why when one house in the neighborhood installs solar panels, they start popping up on the neighborhood homes.

Or, why it seems like everyone in Silicon Valley owns a Tesla.

Now, we’re not saying that either of these purchases are always cases of lifestyle inflation, but the innate desire to be part of the group can foster the habit.

Earning more dollars feels great, but it doesn’t mean much if your net worth isn’t growing.

When we earn more money we can often feel like we’ve earned the right to spend more too.

While it is your choice how you spend your money, its a missed opportunity if you spend rather than save all of your additional earnings. 

So what can you do to prevent your self from falling into the lifestyle inflation trap?

Maintain your budget

If you have a budget already set up, it can be key to keeping you disciplined about your spending.

Keeping all of your individual expenses budgeted the same or deciding how much extra you would like to spend will help keep you conscious about your spending as well as create a new net income expectation. 

If we focus more on net income (income after expenses) than just our income before all of your expenses as a reward, it will help to keep us spending roughly the same.

Rather than getting excited about earning more income, which is definitely something to be excited about but not necessarily reflective of our financial health, we make net income the sole source of our excitement.

In doing this, we continue to incorporate expenses and our spending into how we are doing financially.

The success or failure of meeting your budget expectations should help as you continue to calculate your results after each budget period.

Successfully meeting or beating your net income expectation is surprisingly powerful. The sense of achievement (or failure) can be a great behavior reinforcer for your spending.

If you do not have a budget created, check out our post on Simple Budgeting.

Put Extra Cash into Investment Accounts

If we’ve kept our budget and generated higher net income we likely now have additional cash sitting in our bank account. It can be tempting to spend this cash. 

To combat the temptation to spend your extra cash, put it in a retirement account that has age threshold withdraw requirements.

401(k), IRA, and Roth IRA retirement accounts all have an age threshold for when you can withdraw the funds (unless there are special circumstances) or you face a penalty (and pay taxes for the 401(k) and IRA).

The penalty should serve as a barrier to prevent you from spending your extra cash.

If you’ve maxed out these requirements, first, congratulations, that is quite the accomplishment.

Second, put that additional money into an investment. While you don’t have the penalty to serve as prevention from you spending more, the process of having to sell your investment before you can actually spend the money should serve as a deterrent.

Additionally, selling the investment may result in gains that you have to pay taxes on, serving as another reason to not convert the investment to cash. 

Treat yourself on special occasions

Now, this may seem counterintuitive to preventing lifestyle inflation but you have to treat yourself and reward your successes.

In doing so you reinforce the work that you put in to achieve a higher income as a positive without succumbing to spending more money all the time.

Similar to the advice we give of keeping a level of non-essential expenses in your budget, we cannot have the expectation that we can simply work hard but not enjoy the fruits of our labor.

Sometimes it’s not completely preventing lifestyle inflation but preventing most of it. 

The key is to be conscious of your spending and associate it with a specific occasion. Earning a promotion and treating yourself to a nice dinner or new item rewards you of your accomplishments.

Be cognizant of why you’re spending more when you do it and you will prevent yourself from spending more all the time.

Final Thoughts

Lifestyle inflation isn’t that one-time splurge (unless that splurge is a new car or something very expensive) but the natural progression to a higher level of spending.

It often can occur because it’s an unnoticed behavior. We’re earning more money so it feels like we’re richer and can spend more.

While you can definitely spend more, you are not more wealthy. That comes through building your net assets or your net worth.

To prevent lifestyle inflation, we have to take steps to remove that extra cash from our accessible funds and enhance our awareness of our spending.