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  • Writer's pictureKelsey

The Hard Truth About Lifestyle Inflation

The last time we received a raise, what did we do with the extra income? We likely thought "I deserve this" and made a splurge purchase or upgraded some part of our life.

What is Lifestyle Inflation?

Lifestyle inflation refers to increasing one’s spending when income goes up. Lifestyle inflation tends to continue each time someone gets a raise, making it perpetually difficult to get out of debt, save for retirement, or meet other big-picture financial goals. Lifestyle inflation is what causes people to get stuck in the rat race of working just to pay the bills.” — Investopedia

When we receive a raise or unexpected bonus income, for most, the last thing we think of is saving or investing the money. Instead, we treat ourselves to a new iPad, vacation, or shopping spree. I have been there and while some of those "treat myself" purchases were worth it, many looking back were not.

Dave Ramsey summed up lifestyle inflation as “more money, same problems.”

Something I consider similar to lifestyle inflation is when we pay off our debts. When we finally paid off a debt, where did those monthly payments start going? My student loan payments were ~$500 a month, and sadly I cannot tell you where that $500 a month went after I finished paying off my loans. Reflecting, I realize I moved to a better place shortly after and likely spent more on shopping and eating out with my “extra” income. Had I put that $500 monthly into an investment account I would have over $50,000 now!

So what can we do to fight back?

My Type-A is coming out with this example, but whenever I know I am getting a bonus I create a spreadsheet listing out the cost of everything I’m going to spend it on. Same when I find out what my tax refund is going to be. “Saving/Investing” is always the top row and a non-negotiable. When the money finally hits my account, I know where it is all going, and transferring a percentage to pay myself happens first. Seeing it all laid out lets me prioritize what is important and usually I end up scratching off an item or two that isn't really needed.

With a raise, we may not see a large difference in our paychecks, but it is there. Every retirement account I have seen has an option to enroll in an automated 1% annual increase to our contribution. If we receive a 3% raise at work, it is smart to increase our retirement account contribution percentage. We have been living off our current income, so if we never see that additional money hit our account, we won't notice it's not there.

Don't get me wrong - lifestyle inflation isn't all bad. As we grow in our careers and wages, it is common to want to stop having roommates and get a place of our own. We will outgrow quick cheap fashion and want to invest in a quality wardrobe. The key is keeping those lifestyle upgrades in check.


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