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It may feel like something out of a dream: The big promotion you wanted landed in your lap, a milestone graduation arrived, or a lucrative job opportunity turned into an unbelievable offer. These are the moments that make all your hard work feel worth the grueling effort, knowing that larger paychecks are on the horizon.
But then something known as lifestyle inflation could come along to take all your progress away. This concerning financial effect can impact your wealth wellness, even when you anticipate improvement. But if you take certain mindful steps, you may be able to prevent it.
What is lifestyle inflation?
Commonly known as “lifestyle creep,” this term refers to an increase in spending after a person begins earning more money. Once someone attains extra funds for any reason, they may make subsequent changes to their financial habits either gradually (e.g., raising their grocery and discretionary spending budgets) or suddenly (such as splurging on a vehicle that exceeds their price range).
Concerningly, spending more when you earn more is a very natural inclination; it may even seem downright logical. “Internally, [you] are feeling a need to buy something at a higher price point than you would have in the past,” financial well-being expert Manisha Thakor told CNBC Select. Look to cultural cues, and you may very well associate career growth with a big-ticket celebration like a larger house, shiny new car, or international vacation.
Why is it problematic?
The downsides are simple: Lifestyle inflation can deplete your heightened earnings so dramatically that, despite you bringing in more money, your wealth doesn’t actually grow. As such, you could interrupt your potential progress toward long-term goals like buying a house or retiring someday.
Likewise, lifestyle inflation could work against your efforts to build a healthy emergency fund for incidentals like hospital bills or auto repairs. You could end up taking on debt to pay for these unexpected expenses as a result.
And, when uncontrolled, lifestyle inflation may trap you in a perpetual cycle of living paycheck to paycheck. Surprisingly, high earners may find themselves in such a crisis due to spending habits such as regular fine dining or retail splurges.
What can you do about it?
Thankfully, you can take concerted steps to prevent lifestyle inflation. These are some of the top solutions you can adopt to balance your fiscal habits.
Commit to a budget: Perhaps the most useful salve against reckless spending is establishing limits. Considering your income growth, raise your spending cautiously across certain categories, such as groceries and travel.
Prioritize debts: If you have a high credit card balance or are paying off student loans, for example, direct your enhanced income toward reducing them. Doing so can help you save on interest, improve your credit score, and qualify for a major investment like a home loan.
Avoid comparison temptation: Don’t spend excessively to keep up with the Joneses. The image people project often doesn’t indicate their true financial health anyway, so prioritize the steps you can take to achieve your long-term fiscal goals rather than trying to emulate influencers or your friends.
A positive outlook
Remember that when you achieve more wealth for any reason, you should still celebrate the fruits of your labor. After all, living with a scarcity mindset, in which you hoard rather than enjoy your earnings, is not necessarily the answer. Life is about savoring moments like family dinners and vacations with your partner, which require financial investments.
Alternatively, practice moderation and factor your long-term goals into a balanced wealth strategy, perhaps with the guidance of a financial professional. Be willing to spend sometimes, yet also cut back where necessary—even as you earn more—so you can soak up the perks of increased income while mitigating the downsides.
