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Lifestyle Inflation: A Wake Up Call

By Amanda Reaume on June 25, 2016 No Comments
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When you get a raise at work, do you immediately think about what you’ll buy with the extra money? When you find out that you’ll be getting an income tax refund, do you plan a trip or a special outing?

If it seems that no matter how much money you make you have a hard time paying your bills, you might be guilty of lifestyle inflation. While it might start out with a splurge here or there, when lifestyle inflation becomes a habit – it can be dangerous. That’s why we’ll show you how to recognize if it’s something you do and how to combat it.

Consider this is your wake-up call.

What Is Lifestyle Inflation?

Lifestyle inflation is the phenomenon by which people increase their spending as they make more money. While most people increase their spending a little bit when they get a raise, lifestyle inflation is what happens when their increased spending keeps pace with or exceeds your increased income. No matter how much money they make, they still do not have money left over.

Sometimes lifestyle inflation occurs when people spend too much on big things like housing, vacations, or cars. For example, people often buy or rent a house that is too expensive for them and then have to spend a big proportion of their paycheck on it. Or they buy a luxury car when they can’t really afford one or go on lavish trips that are beyond their means.

Other times, lifestyle inflation occurs when people spend too much on a number of little things like if they go out for expensive dinners too often or spend too much going shopping.

Why Is It So Dangerous?

Lifestyle inflation might seem innocuous, especially if your spending isn’t exceeding your income. But the problem is that many people who inflate their lifestyles aren’t saving enough. They often don’t have an emergency fund saved in case something happens like they lose their job. Or they aren’t saving for things like their children’s education expenses or retirement.

People who live at or above their means are more likely to face problems when something unexpected happens like if their car needs to be fixed. That’s because there is no money left over in their budgets at the end of the month to help pay for these things.

People who live an inflated lifestyle are also more likely to go into debt because they exceed their means or because they have no other choice but to resort to credit cards or loans when they run into problems. These people will likely have a difficult time getting out of debt since they aren’t used to cutting back on their expenses.

Over time, chronic lifestyle inflation can create stress as people struggle to meet their increasing obligations or as they approach retirement and start to worry about their lack of savings.

What Can You Do To Combat It?

If you find that you’re guilty of lifestyle inflation, here are 5 things that you can do to combat it:

1. Live Below Your Means

The opposite of lifestyle inflation is living below your means. People who live below their means would rather spend less money and save for the future or in case of emergencies. Living below your means could translate to just saving 10%-20% of your income every month, but some people who live below their means save more than that! Decide what percentage is right for you and be sure to spend less than you can afford to spend.

2. Celebrate and Then Save

If you get a raise or a financial windfall, many people want to celebrate their newfound largess by spending. There’s nothing wrong with a small splurge – it’s just when it becomes a habit that problems begin. The next time that you get a raise or a windfall, earmark 5%-10% of this extra money towards buying something you really want or going out for dinner. After that, save the rest.

3. Automate Your Savings

If having extra money in your bank account is tempting, then remove the temptation. Set up your bank account so that a certain amount of money is automatically transferred from your checking account each month into a savings account, RRSP, TFSA, or investment account. This won’t just help you build your long-term savings, but it will also keep the money out of your greedy little hands.

4. Get Financial Advice

Since many people who give into lifestyle inflation do so when they spend too much on big things like homes, vacations, or cars, if you think you’re likely to do this then you should hire a financial advisor. A financial advisor will help you create a financial plan that will take into account all of your goals. They will be able to crunch the numbers to see if it makes financial sense for you to buy that fancy car or that four-bedroom home. They will also help you set up a budget that will allow you to stay on the path to a great financial future.

5. Avoid Temptations

Every time I go to the mall, I see things that I feel like I absolutely must have but which I would never have known about if I had never been in the mall on that particular day. If you stay out of places that cause you to want to buy things you don’t need, you will reduce your impulse purchases. Since you won’t know what you’re missing – you won’t really miss it. If you get an urge to splurge every time you go to a particular place, then try not to go to it. If online shopping is a temptation, then block the websites that make you want to spend. Find ways to avoid temptation as much as possible.

Image Credit: Prateek rana

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Amanda Reaume


Amanda is a freelance writer and the creator of the blog Millennial Personal Finance. After graduating from university with no debt, and $40,000 in savings, Amanda wrote the book The Complete Guide to a Debt-Free Education. She is also the author of a personal finance book aimed at Millennials called Money Is Everything.

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