How Lifestyle Inflation Can Erase Your Financial Success

A Primer On Lifestyle Inflation

Everyone has a definition of what lifestyle inflation is, but I'm going to define it in story form. You know how when you get a raise, bonus, or a nice tax refund, but come end of the year you have the same amount (or lack) of money you've always had?

Most people say, "Where in the world did that money go?" It wasn't that you intentionally spent it on a big purchase, although a lot of people do. It seemed to evaporate. You, my friend, have experienced lifestyle inflation.

It is when your expenses rise to meet your desired quality of life. Without active monitoring and bench marking, it'll happen to you and you won't even notice it until it's too late. The damage gets worse when you have no emergency fund savings, no investments, and very little retirement.

How Lifestyle Inflation Affects You Long-Term

Lifestyle inflation doesn't hurt you short-term. It hurts you where it hurts worst, the long-term. My financial planning firm works because I fight on behalf of your future self. It doesn't matter if it's your 30 year-old self, your 90 year-old self, or yourself 8 months from now. Many people aren't able to delay gratification to help themselves long-term.

Not to be a downer, but every dollar you spend today is between $6-10 you are robbing your future self of 40 years from now. The effects of lifestyle inflation are huge. The worst part is that you'll never even notice it if you aren't paying attention.

Why Does Lifestyle Inflation Occur?

Lifestyle inflation can stem from a few things:

  1. Keeping up with the Jones's
  2. As your income goes up, your expenses tend to go up
  3. Entitlement: "I work hard so I deserve this..."

Keeping up with the Jones's can be as expensive as buying a house because your younger friend just bought a house. It can be as little as going for drinks with your friends and since they got an expensive cocktail, you get an expensive cocktail.

Number two is self-explanatory. The easiest way to combat this is to track your expenses on a monthly and annual basis. If you are making more money and spending more money than the year before, then you are probably experiencing lifestyle inflation. There is an exception for when you are in debt-repayment mode. In that case, look to see if your expenses grew in lockstep with your income, and did your net worth grow from year to year.

Entitlement is something I personally struggle with. It's the feeling of, "Hey I just signed my fifth client, let's go out and celebrate!" This is the easiest way for lifestyle inflation to creep in. Why? Because you feel very little guilt when you are rewarding yourself for hard work.

How Does Lifestyle Inflation Affect Millennials?

When you have so many competing financial priorities, lifestyle inflation enhances the complexities. How so? Well, you were already stretched thin within your first few years of full-time work. You have been comfortable, but until your debts are paid off and you're on track for saving and investing for your long-term goals, you are in a permanent cycle of budgeting, monitoring, saving, and repeating. Lifestyle inflation makes these steps a little harder each year.

As millennials, we are inundated with ads. It is rumored that we are exposed to 3,000-5,000 ads per day. We also are the first adults to have social media as a form of connecting with others before adulthood. This has elevated the "Keeping up with the Jones's" aspect of lifestyle inflation.

When we see what others have, what influences are praising, and what material things are popular, our human nature gravitates towards those things. Matter of fact, studies show that heavy social media use has lead millennials to be unhappier. This is an unintended effect of the always-connected world we live in.

Lifestyle inflation flourishes in a social media centric culture, where everything is on display and we only see the best of our peers' lives. Never the late night fights or the constant working, just the beach vacations and pearly white smiles. Our human nature can't help but see this and want more. But how do we get more? We put our financial future on the back-burner and give in to our nature. We buy more and save less.

How To Combat Lifestyle Inflation

One way to push back against lifestyle inflation is to know the purpose of your money. If you haven't taken seconds to find out your "why", you're going to be stuck working at a job you hate, to buy things you don't need, to impress people you don't like - as Dave Ramsey says. Setting the agenda for your money will allow you to see the lives of others and think, "Good for them. A house is super low on my priority list..." and move on with your life.

Creating a spending plan, or a budget, for how your income will be allocated can also help shut the door on lifestyle inflation. As millennials, we have our money going in hundreds of different ways. Combining the knowledge of the purpose for your money and the strategy of your spending plan is how you steer clear of expensive fad purchases.

When you create a spending plan in terms of percentages, you are able to anticipate any raises, bonuses, or sizable tax refunds. This is the trick that a lot of millennials my firm meets with don't grasp early on. They see an extra paycheck on an odd month or a random cash gift from their boss as a windfall. They forget that this is technically still income. It is an inflow of money into your bank account that wasn't there before.

If you allocate 15% of your monthly income to saving and investing, when your performance bonus and tax refund hit, you need to take 15% (or more) from those as well. No exceptions. This will stop lifestyle inflation in its tracks.

The best part about a spending plan based on percentages is that your entertainment, food, and fun budgets increase as well as your retirement savings when your income increases. Both your current self and your 65 year-old self win.

When is the last time you looked to see if you're suffering from lifestyle inflation? You can do this by examining your purchase history before and after a raise.


Stephen Alred Jr. is the founder of Ignite Financial, a fee-only financial planning firm geared towards serving millennials. Stephen got his start in financial services working for financial expert Dave Ramsey. Since then he has been serving others through helping them with their personal finances. He is passionate about startups, reading, and UNC basketball.  You can connect with him on twitter @salred or by visiting his startup's website