Lifestyle Inflation, also known as lifestyle creep, occurs when individuals increase their standard of living as their discretionary income rises. It becomes a problem when they prioritize luxuries instead of paying off debt, building an emergency fund, or saving for retirement. Ultimately, it prevents them from building wealth and makes their lifestyle increasingly expensive to sustain.
In the younger population, it usually occurs after college when graduates obtain their first well-paying job. Seeing a surplus of income in their bank accounts is new and exciting. This surplus makes it easier to justify splurging on merchandise they would have otherwise considered too expensive. Suddenly, their starving-student mindset may begin to become a thing of the past and upgrading personal accessories or going on expensive dates become more frequent. Things that were once considered luxuries become justified as present necessities.*
They may consider financing a brand new $20K+ car instead of a used car option or taking public transportation. Practicing these habits may lead them to prematurely upgrade their housing situation without evaluating their financial situation and impact of accumulating more debt.
Suddenly, their lifestyle costs 5x more than when they were a student and are still living paycheck to paycheck while making minimum payments on their debts.
Now, they are stuck in the rat race where they will remain dependent on their employer to sustain their lavish lifestyle. Essentially, they have become a slave their job and a victim of lifestyle inflation. Without a change in spending habits, bigger financial goals such as paying off debt, accumulating wealth, and achieving financial independence become increasingly difficult to achieve.
Victims of Lifestyle Inflation Will Typically Exhibit Behaviors Such As
- Purchasing increasingly expensive items, especially those that serve the same purpose
- Rationalize the reason TO purchase rather than the reasons NOT to purchase
- Make unplanned purchases aka impulse purchases
- Feel the need to keep up with your neighbor, friends, or colleagues
You Are Susceptible to Lifestyle Inflation If You
- Are a recent graduate who is about to land their first well-paying job
- Are near retirement and have a surplus of discretionary income due to paying off your longstanding recurring expenses such as mortgage, car, student loans, and child-related costs
- Work where promotions and bonuses are frequently available
Tips to Avoid Lifestyle Inflation
- Alter your mindset: Value experiences and people rather than materials
- Be patient: You can own nice things, just not at the expense of more debt
- Be thrifty: The less you spend on nice things, the more you have to spend on other things
- Ignore the superficials: It’s easier to appear wealthy than to be wealthy
- Build discipline through exercise. This discipline can help you achieve financial goals. It also releases endorphins making you happier and less likely to seek happiness in frivolous purchases.
* Splurging is not an absolute evil. After all, we need to enjoy life. When you splurge, be sure to gain long-term value out of your purchase. Make sure the expenses still allow you to reach your financial goals.