What is Lifestyle Inflation & How to Avoid it

I’m a strong advocate for making more money. More money means more savings for retirement, for your kids, for yourself. More money can also mean paying down more debt (in fact, it’s one of the ways that you can effectively pay down debt faster). But there’s a phenomenon that happens when you make more money: you spend more money as a result.

This is called “lifestyle inflation” and it happens to almost everyone. It’s why professional athletes blow through millions of dollars in a short period of time. It’s also why celebrities are on top of the world one day and at the bottom the next. If it can happen to these people that have expensive financial advisors (albeit awful ones), it can (and probably will) happen to you.

The Golden Trap

It’s not our fault, but we live in a society of instant gratification. We see something, and we want an instant result. When you have more money in your pocket from another job or larger take-home pay, you may feel like you can spend more. It makes sense in some ways. Those things that were once unattainable suddenly become plausible - the house, the vacation, the designer clothing, etc.

But it’s a trap. It’s lifestyle inflation, and it will cause you to spend all of those extra dollars faster. In some cases, it may even lead you down the path to increased debt. Imagine what would happen if you spent a lot of money on a large ticket item (boat, car, etc.) and then suddenly lost that extra job or got demoted? Lots of debt that you may not be able to pay off!

A Better Plan

Instead of spending more money once you starting making more money, consider saving those additional dollars. Make a budget based on your older salary and stick with it when you increase your monthly income. I suggest putting some of that money towards any debt that you might have - so if you’re increasing any spending, it’s the amount that goes towards debt and not the amount that you spend on material items.

It’s also a good idea to put some money into a retirement or savings fund. You never know when you might need those extra dollars. So while it’s nice to know that you could buy that $5,000 Iron Man costume or those $4,000 pair of shoes, save your money instead and don’t become a victim to lifestyle inflation.