Managing lifestyle inflation

“Lifestyle inflation” is a very popular topic amont financial planners and personal finance bloggers. But what is it exactly?

lifestyle inflation is increasing your spending when your income goes up

This is the very definition of lifestyle inflation. And yes, we are all pretty much guilty of lifestyle inflation.

This is particularly true when transitioning from student to employee. Most students have to get by with very little, and most make do.

But once the first real paycheck arrives, boy, oh boy!

lifestyle inflation is not always bad

Once you make more money, it is perfectly normal and acceptable to want to live and enjoy life more. Actually, it is not expected of anyone to keep living like a student or a pauper for the rest of their lives!

It is normal to think about having your own place, going on vacation, buying new clothes vs.second hand ones etc…and to actually do those things.

Lifestyle inflation becomes a problem when your spending causes you to live paycheck to paycheck, prevents you from paying debt off and from saving for retirement and other goals.

lifestyle inflation can be managed

Yes, you can still have your cake and eat it too. Here are a few tips.

figure out your new compensation to the penny

If you landed a higher paying job or a promotion, figure out how much you will make on each paycheck. Keep in mind salaries are always gross amounts in North America. After taxes, you may be surprised to realize it is not as much as you thought.

revisit your budget, particularly the “fun” category

Give yourself permission to spend a set amount each month on things you really like and that makes you happy. Don’t worry about what other people think. It is their problem not yours.

revisit your goals

I found it also helps to focus on short-term, medium-term and long-term goals. When you have saving goals, your save towards them instead of spending mindlessly.

If you are about to charge something to your credit card, ask yourself whether this purchase is in line with your goals and within your budget.

forget about the joneses

They are probably broke anyway! Not to mention your material possessions do not define who you are as a person.

final word

I personally do not believe lifestyle inflation can be completely avoided. I also believe it is normal to somewhat spend more when earning more. However, it is possible to manage lifestyle inflation. Like everything else, it does require some discipline.