Right now, we are all keenly aware of the effects of inflation. A trip to the gas station or grocery store provides a good visual of how our purchasing power has been reduced. However, many people are also experiencing the impacts of lifestyle inflation alongside it. If you aren’t aware of your spending habits or the rise of lifestyle inflation, you could find yourself out of your financial depth.
The Definitions of Inflation vs Lifestyle Inflation
Unfortunately, most people don’t understand the difference between inflation vs. lifestyle inflation. Therefore, it’s easy to confuse the two terms.
Inflation refers to a currency’s reduced purchasing power. For example, the increased cost of food, gas, and other living expenses are good indications of this. Although your income hasn’t changed, the goods and services you usually buy are more expensive. This means you can afford less, which demonstrates your reduced purchasing power.
On the other hand, lifestyle inflation refers to the rise in spending when your income increases. This usually happens during transitional periods in your life such as college graduation, getting a raise, or earning a promotion with a bigger salary. When you earn more money, it makes sense that you spend more. However, spending tends to grow with each raise or source of additional income.
The Rise of Lifestyle Inflation
Lifestyle inflation, or lifestyle creep, can sneak up on you if you don’t monitor your spending habits. It can become a major problem if it inhibits your ability to save and build wealth. However, you may not even realize that you are dealing with lifestyle inflation until it is too late.
Although it’s hard to pinpoint, there are several factors that lead to up to it. It usually begins when you receive a significant income increase and decide to reward yourself for your efforts. While there is nothing wrong with treating yourself or enjoying some of your hard-earned money, it can become a problem if you are over-indulging.
If It Makes You Happy…
With so much negativity in the world, many would use a financial windfall to compensate by spending money on things that make them happy. If you worked hard to achieve the reward, then you deserve to enjoy the money, right? This thinking is fine in small doses, but the need to compensate has led to a rise of lifestyle inflation.
The impacts of lifestyle inflation become even more complicated if you are using money or objects to fill a deeper need. Some people start to believe that the objects and services they can now afford will make them happier or more satisfied with their lives. Then, they keep spending more on things that will never make them happy rather than rooting out the source of the problem. If you place greater value on acquiring things, maintaining appearances, or equating objects with their personal happiness, you will lose control of your finances.
The Need for Acceptance
Additionally, people are social creatures and tend to imitate those who they spend the most time with. It’s normal to want acceptance or to fit into your social group. However, it can have a devasting effect on your finances if your social circles spend more on things than you can really afford. Keeping up with the Joneses is a dangerous game to play, especially if it all could all come crashing down when you can no longer sustain it.
Getting Stuck in the Cycle
Even those who have successfully lived on a budget give into temptation and splurge on things they never needed before. Then, they start regularly paying for things that were once considered luxuries but have now become necessities. However, if your spending is outpacing your income, you are no longer living within your means.
It’s easy to get stuck in the spending cycle, even when it becomes more difficult to meet your minimum monthly payments. And if you are combatting inflation at the same time, you will find yourself fighting a losing battle.
How Can You Avoid Lifestyle Inflation?
The only way to avoid lifestyle inflation is by making financial independence a top priority. This starts with the fundamentals of finance such as creating a budget and establishing positive habits. Staying ahead of lifestyle inflation also requires constant attention to ensure you are on track toward your financial goals. However, here are five additional things you can do to avoid falling into negative spending cycles and lifestyle inflation.
1. Recognize wants vs. needs.
One of the first steps towards financial independence is understanding the difference between your wants and needs. After you identify the living essentials, it will make your priorities clear. Then, you can adjust your budget based on what’s most important to you.
2. Do the math.
While your salary increase may look significant on paper, it doesn’t impact your finances as much as you’d think. If you do the math to figure out your actual take-home total after taxes and living expenses, you may rethink some of those larger purchases.
3. Create an automated savings plan.
This is good advice for any budget. If you automate your savings plan, you can ensure that building a safety net will always remain a top priority.
4. Make gradual changes.
If you can afford the nicer things in life, there is no shame in enjoying them. However, it’s better to make gradual changes when you start moving up the tax brackets. Instead of splurging on all your lifestyle upgrades at the same time, perhaps make smaller changes as you adjust to your new budget.
5. Focus more on experiences than things.
While having nice things can bring temporary happiness, you need to understand that it’s the intangible experiences that make life worth living. Instead of buying more things, find ways to spend money on experiences and making memories instead. In the end, the time we spend together and experiencing what life has to offer is more valuable than any object.
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Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to either working with children, she also enjoys good friends, good food, and new adventures.