Making more money? Here’s how lifestyle inflation could cost you

Suppose you receive a significant salary raise at your job. You might initially be tempted to use that raise for things like upgrading your car, moving to a more expensive apartment or going shopping more frequently.

The tendency to spend more as you make more money is called lifestyle inflation, and it can potentially lead to financial pitfalls by creating unsustainable spending habits and overshadowing long-term financial goals.

Here’s everything you should know about lifestyle inflation and how to manage higher income more effectively.

What is lifestyle inflation?

Lifestyle inflation, sometimes called lifestyle creep, refers to the phenomenon in which people increase spending and upgrade their standard of living as income rises. It might occur unconsciously, driven by a desire to keep up with others with higher incomes or reward yourself for hard work.

Some triggers that might provoke lifestyle inflation include:

• Salary increases or promotions
• Bonuses and windfalls
• Graduation
• Moving to a more wealthy neighborhood

If you’re in one of these scenarios, note if and how your spending changes. If you find yourself purchasing more luxury items, dining at expensive restaurants more frequently and taking more lavish vacations, you’re likely experiencing lifestyle inflation.

The costs of lifestyle inflation

While lifestyle inflation may initially bring a sense of newfound wealth and enjoyment, it often comes with longer-term costs that can impact your financial wellbeing:

1. Increased financial obligations: As expenses rise from upgrading living standards, you might find yourself having higher monthly bills, such as increased rent or mortgage payments, car loan installments and insurance premiums.
2. Diminished savings: Lifestyle inflation might lead you to prioritize immediate gratification over long-term financial security. As a result, savings, retirement contributions and other investments end up neglected. If you lose income, such as from a job loss, you might find yourself without savings to fall back on.
3. Accumulation of debt: As the excitement of spending more kicks in, you might go overboard and exceed your means, resorting to credit cards or personal loans to fund purchases. That debt can accumulate quickly, and monthly interest payments increase along with it. This can create a cycle of debt dependency, making it harder to achieve financial freedom.
4. Reduced financial flexibility: Lifestyle inflation can make you reliant on a higher income to sustain your new expenses. This limits the ability to adapt to changing circumstances or financial emergencies.
5. Missed opportunities: There’s an opportunity cost that comes with spending more on lifestyle upgrades and luxury items. That increased income could otherwise go toward new hobbies, investing in education or other more meaningful experiences.

Strategies for managing higher income without overspending

Here are some ways you can avoid the pitfalls of lifestyle inflation and make the most of a higher income:

• Set clear financial goals: Define both short and long-term financial goals, such as saving for a down payment, paying off debt or building a retirement fund.
• Create a realistic budget: Your budget should align with your goals and increased income, but it should also be relatively flexible for when your circumstances change. Prioritize savings and debt reduction while leaving room for reasonable discretionary spending.
• Delay gratification: You don’t have to guilt yourself over every purchase you make. One way to avoid much of that guilt is by taking some time (perhaps a day or a week) before making an impulse purchase to evaluate its value to you. After that time, you might find you’re less interested in the purchase — or, if not, you’ll know it’s something you truly desire.
• Automate savings and investments: Set up automatic transfers to savings accounts or retirement funds to ensure consistent contribution and limit the temptation to spend excess income.

The importance of long-term strategies

Long-term financial strategies are essential to financial security, building wealth and feeling fulfilled in general.

Establishing a robust emergency fund is a good priority to have for the long term. This safety net should cover three-to-six months’ worth of expenses, depending on your budget, and will protect you from unexpected financial setbacks.

Long-term strategies not only focus on financial aspects, but also on your overall well-being and fulfillment. Consider how you can invest in your future. Investing in things like a retirement account, stocks, bonds or certificates of deposit (CDs) can provide opportunities for your money to grow over time. With that built-up wealth, you can fund a more enriching retirement or support your children’s education.

It might be worth seeking professional advice from a financial advisor to develop and execute long-term wealth-building. An advisor can help you maximize an investment portfolio, create a retirement plan and navigate complex financial decisions.

Bottom line

While earning more money can be a big milestone in your financial journey, it’s crucial to be mindful of the potential risk of lifestyle inflation. Understand the implications of lifestyle inflation to avoid unnecessary financial stress and work toward long-term financial stability. You may find that securing your future and living out your unique financial goals leads to greater fulfillment than making expensive purchases.