What is Lifestyle Inflation?
Have you noticed that even when your income increases, it can feel like you still don’t have more money leftover at the end of the month? That’s because often, when our income increases, our expenses do too. This is a very real phenomenon called lifestyle inflation that can sneak up on us despite our best intentions to save.
Lifestyle inflation is often caused by something called pent-up demand. In other words, with your lower income, you were sacrificing something you wanted or needed in order to save for a specific goal (read more about opportunity costs) or because money is tight.
Now that you have a higher income, you start spending more money on that pent-up need. Consider these examples:
- You get a raise and buy a new car that you’ve been needing for a while
- You get a better-paying job and start eating out more because the job is more demanding and you have less time for shopping and cooking
- You graduate from college and get your first job, but also start sending more money to support your family members who’ve helped you along the way
You want your higher income to get you closer to your overall financial goals, but your money mindset can also get in the way. Sometimes when people are accustomed to struggling financially, they spend their way back to what feels comfortable.
Learn more about your money mindset with this video I made about finding your money style.
How to Avoid Lifestyle Inflation
There are a lot of reasons that our expenses often increase as our income increases. So how do we avoid that?
The trick is to set short, intermediate, and long-term financial goals and hold yourself to them. Create a policy for yourself about what you will do with increased income. Make sure your goals are specific and measurable. For example, you may decide to automatically save 10% of any windfall or increase in salary.
As always, it’ll be easier to follow through on your goals if you know your “why.” Remembering your goal will help you stay on track when you have multiple financial priorities.