How To Avoid Lifestyle Inflation in 7 Steps

Lifestyle inflation is a thing that happens to all of us and most of the time we don’t even realize we are being sucked into the black pit of lifestyle inflation. Getting a hold of your lifestyle inflation is not that hard if your mindset is right.

To avoid lifestyle inflation making a realistic budget that will allow you to have fun is essential. When getting additional income (promotions or side hustles) you should remain with your budget and not spend the extra income. You must also stop the mindset of trying to impress other people.

Having experienced and dealt with lifestyle inflation I have some tips despite my young age. I was fortunate enough to be raised in a family conservative around money, which gave me the inside to how to avoid the lifestyle inflation everyone is experiencing every day.

How to avoid lifestyle inflation i 7 steps
How to avoid lifestyle inflation i 7 steps

What Is Lifestyle Inflation?

Lifestyle inflation is when ones spending increases as their income increases. Lifestyle inflation happens when you finish college, get a promotion, start a side hustle, sell old stuff, etc. Lifestyle inflation is a bad thing as even high-income earners can be emptied out for money. High-income earners purchase Lamborghinis and big mansions which built up more debt and the result is the same as lower-income earners when comes to the income to expense ratio.

Lifestyle inflation is an event that happens throughout life, and it can make it hard to get out of debt and save for retirement. Lifestyle inflation is often used to describe the phenomenon known as the rat race. You want happiness, so you work more to earn more, and when you earn more you purchase more. Which is just an evil cycle.

Lifestyle inflation is normal because we are told by society that houses, nice cars, and exotic vacations make us happy. When you get out of college, you should get a house, a car, get married and have kids. If you don’t, you are “unsuccessful”. Don’t believe me?

Let me show you an example to put the works of lifestyle inflation in practice:

What is the first thing you think of when you hear an engineer that does not have a car and lives in a rented apartment?

Most people think that this particular person is unsuccessful. An engineer is a high-status job, who normally earns a lot of money. Therefore, it is expected that an engineer has their own owned place with European cars.

The Misconceptions of Lifestyle Inflation

Quality of life is still a scale that must be understood when talking about lifestyle inflation. When the earning potential increases and the possibility of house, cars, and fancy diners become a reality there is nothing wrong with adding some quality to your life.

One of the common misconceptions with lifestyle inflation is that it is everyone else’s fault. However, you are solely responsible for the money you spend. You are responsible for exceeding your budget, you are responsible for taking that payday loan to purchase the newest iPhone, you are responsible for wasting your money towards something that does not benefit you in the long run.

Another misconception is that lifestyle inflation is not allowed to happen. If you get a 10% raise you can celebrate the success, taking your family out to dinner, go on a weekend trip, and so forth. However, the raise should not be an excuse to use the 10% on going out and popping bottles essentially wasting your 10% extra income. This is a fine line and one of the tricky topics of lifestyle inflation. Because how much spending is too much to be seriously impacted by lifestyle inflation?

The last misconception is that you shouldn’t ever be able to upgrade your lifestyle. Avoiding lifestyle inflation is to escape living paycheck to paycheck due to the excessive use of money (no matter the size of your income). If you have saved some money together and the current housing is to small for the size of the family, then you could find something larger. It could also be that restaurants are something that is enjoyable to you, allowing a couple of tours to restaurants per month will be okay as long it is accounted for.

Looking into my own personal finances I to have some expenses that should not exist. When you look at my about page you can see I have a passion for watches. That is a crazy expensive lifestyle inflating hobby. Similarly, if you follow my monthly income statement you can also see that my expenses vary a lot. But that is a part of life, and before knowing what you spend your money on it is impossible to do something about it.

How To Avoid Lifestyle Inflation

Avoiding lifestyle inflation is not commonly done when doing the day-to-day basis. With common sense and a 5 minute read you can learn a lot about how to avoid the terrors of lifestyle inflation. To keep it simple you have to do some or all of the below:

  1. Create a reasonable budget.
  2. Stop trying to impress others.
  3. Do not take up more debt.
  4. Pay yourself first.
  5. Take advantage of tax deductions.
  6. Stop the entitlement mindset.
  7. Do not be around “big spenders”.

While all the 7 bullets above are not necessarily applying to you, they are all things that should be considered if you think you are being exposed to lifestyle inflation.

For some, it is enough to create a budget for others it is going through all 7 bullets. No matter what position you are in you should consider how much you let yourself be exposed to lifestyle inflation.

Create a Reasonable Budget

The most essential to everyone’s finances on the entire planet is a budget. Making a budget will have multiple benefits. Firstly, it allows you to set a maximum on your spending on the different budget posts. Secondly, it estimates your monthly spending. Lastly, budgets are personal and therefore you can determine what you want to spend on each post.

Make a reasonable budget
Make a reasonable budget

Creating a budget can be done in 5-10 minutes if you already have an idea of your current spending. At most, it will take a concentrated 30 minutes. However, it will be worth your while.

Getting a good overview of your spendings will help you understand where the lifestyle inflation is coming from and likewise help prevent it. Typical lifestyle inflation budget posts are eating out, “cool” cloth, and new gadgets.

Using the budget you can set a maximum on how much you wish to spend on the different budget posts. However, if you are in the unfortunate situation where it is loans that have built up the lifestyle inflation then you have no option but to pay off the debt.

The budget is personal therefore you cannot copy your neighbors budget and expect it to work for you. The great thing about a budget is that you can determine what you want to use your money on.

The most important thing to remember when making a budget is that your monthly spending must be lower than your monthly income.

Stop Trying To Impress Others

Keeping up the Joneses is a known term for wanting/buying what everyone else has. An example is when your neighbor gets a new dishwasher. A top of the line model that has all the newest features. The dishwasher you have is 15 years old and sounds weird. Although it works perfectly, you want to purchase the same dishwasher as your neighbor. This is known as “keeping up with the Joneses”.

Trying to impress others is one of the major lifestyle inflators. You get the newest phone to impress all your friends with the new features this year’s model has that they don’t. You are so much cooler than them now, right? Wrong… You are buying expensive items to impress and feel better than others.

It is an expensive habit to always have the newest gadgets, nicest cloth, and most hyped up items. The only thing it might do is one day of fame. After the items have been showed off they become the new normal. So everyone will slowly begin to upgrade all their gadgets, cloth, and hyped items just after the first person shows off.

https://www.youtube.com/watch?v=UG_NmAQJP1k
Gary Vaynerchuk’s rant on impressing others.

Impressing others are hopeless and it will only keep you financial poor and trapped in the lifestyle inflation.

Do Not Take Up More Debt

When you get that pay raise, finding a side hustle that makes good money or making any other additional income you should not add any new debt just because “you can afford it”. Adding debt to your budget is a step backward when fighting lifestyle inflation.

If you have a mortgage and a car loan that is theoretically fine. But you should start taking consumer loans to fund the purchase of the newest and greatest consumer goods.

If you are fortunate enough to only have a mortgage, don’t take out more debt to purchase a new car. When the time comes to get a “new” car, try to look at the secondary market. There are cars 3-4 years old to under half to a third of the original cost price.

Debt is toxic for personal finances because the loan itself has to be repaid. On top of the principal, there is an interest that is to be paid as well, which makes the budget even tighter.

Pay Yourself First

You should always pay yourself first. This is based on the fact that upwards of 60% of people are unable to pay for emergencies upfront. This is due to a lack of saving and poor spending habits, also known as lifestyle inflation.

The idea of paying yourself first is when you make a monthly payment towards saving, investing, retirement, etc. This is a method used a lot in the Financial Independence Retire Early (FIRE) community. Many FI and FIRE bloggers calculate their savings rate. The savings rate is a tool used to understand how much or how little you have spend of the income earned. The formula is very simple and should be considered when making and tracking the budget:

Savings rate percent = (Income-Expenses) / ((Income+Expenses) / 2) x 100

When using the savings rate to fight lifestyle inflation you should never go for a fixed percentage. When the income increases you might actually put more to the side with the same percentage. But to avoid inflating the lifestyle the percentage should increase equivalent to the increase in income.

Someone earning 5.000 per month with expenses of 2.500 has a savings rate of 50%. If the same person where to get a raise to 6.000 per month they could now inflate their lifestyle with 500 extra in spending.

Savings Rate TableNew IncomeNew SpendingNew Savings Rate
Fixed saving rate6000250058.3
Increase saving rate6000300050

Instead of spending the 500 extra per month, they could be used to save up an additional 8,3 percent per month. This could contribute to paying down debt, retirement, investing, etc. Inflating a lifestyle will not be the answer if the current lifestyle gives a sense of happiness.

Take Advantage of Tax Deductions

There are many ways to take advantage of tax deductions. This is also a very country-specific topic. However, there are some tax deductions that can be found generally on a global scale. On the almost universal tax deductions is retirement. Contribution to retirement accounts typically gains tax deduction in the year the deposits where made or in the retirement account itself. It can come I a lot of forms such as low tax rate on profits, lower tax rate on earned income, lower tax rate upon retirement when withdrawing, etc.

A special tax deduction in my region is the mileage allowance. There is a fixed tax deduction based on the range you drive to and from work. When living far away from the workplace the mileage allowance is a great way to reduce the own spending towards gas.

This just goes to show that there are tax benefits to gather if you look for them. It can be difficult to look up every tax deducting/benefiting method but ask family, friends, colleagues, and government employees within the tax system in your region.

Cutting taxes is a major factor in the long run when looking at the savings you could potentially “earn back” from the tax deductions.

Using an equivalent income with two tax percentages, a total difference of 13.795 is found over 20 years.
Tax deduction benefits example

Let us say you are a European citizen with the average income of 1,916 euros per month. This amounts to 22.992 in a year. If it possible to find a 3 percent tax deduction per year, it would be possible to accumulate a total tax saving of 13.795.

Stop the Entitlement Mindset

When the new colleague gets a brand-spanking-new BMW 500 series all you do is being jealous wishing it was you driving that BMW. Why? because he is your colleague and you are entitled to have just as nice things as him, right?

Lifestyle inflation happens through trying to impress others with fancy things like Mercedes and BMWs.
Lifestyle inflation happens through trying to impress others with fancy things like Mercedes and BMWs.

There is no need for fancy cars and big houses if you are fundamentally satisfied. You are not entitled to nice things just because you see other people having nice things.

When the material wealth mindset starts to force its way into your head, it becomes important to resist the thought that wealth is the material possessions. Wealth and happiness is not measured in possessions but in how you feel in life.

Do Not Surround Yourself With “Big Spenders”

The term big spender is relative to your income. But when you look at your inner circle of friends, family, colleagues, etc. you must be aware of those that spend a lot of money for two main reasons:

  1. You don’t know what they earn
  2. They might increase your lifestyle inflation

1. You Don’t Know What They Earn

When you don’t know what your inner circles earn it is difficult to compare lifestyle. Likewise you shouldn’t try to keep up with them. It can be a dangerous game to keep up with the inner circle because it can open the gates to “lending money”. Lending money between the most valuable people you have in life to fund restaurant visits, city shopping, etc. can be a very bad mixture.

If they have twice the income it will be impossible to repay if the lending continues.

2. They Might Increase Your Lifestyle Inflation

When you are around people who spend a lot of money you will be tempted to use money along with them. Common examples is when going out shopping with friends. You have a budget, which allows limited but realistic spending, whereas the friends do not budget and rip open their pockets to get the latest and greatest. When the friends start shopping all the nice cloth, new phone, and a lot of other consumer goods, you would easily be tempted to exceed your budget.

What Are The Negative Sides of Lifestyle Inflation?

Lifestyle inflation is not a good thing by any means. Overall the discussed topics are all with a negative bias. However, lifestyle inflation does provide some general negative side effects.

The two general negative side effects are financial stress and seeking status. Both impact your life negatively, mostly psychological. If possible such situations should be avoided.

Financial and Psychological Stress

The financial stress one can undergo trying to keep up with the Joneses can be immense. When extending the budget to using every penny earned it is only natural to feel a lot of stress. There is no room for retirement, emergency fund, investing, unforeseeable expenses, etc.

It turns into a circle: Trying to find happiness → Working to earn more money → purchasing more stuff → Trying to find happiness… and so forth. This could lead to consumer debt. Ultimately, avoiding lifestyle inflation is about living free of worries from financial worries.

Seeking Status

With the stress of trying to “outrank” others giving financial and psychological stress, trying to be a status symbol will never uphold. You might be known as the guy with the newest phone. However, being the one with the newest phone only lasts a couple of days. It is also expensive to keep trying to make a status symbol out of yourself.

Often times people don’t concern themselves with your material goods. Therefore, the status which you gain is short-lived. And while seeking status can be quite satisfying you would have to keep spending it uphold the status. When you inevitably cannot keep up with the purchases, you will lose the status and people will forget within the next five seconds.

Bottom line, lifestyle inflation should be avoided.

My Experience With Lifestyle Inflation

Lifestyle inflation is as discussed as something that happens to every one of us. My experience has been both good and bad. I have inflated my lifestyles at times, but have gotten quality of life in return.

It is important to keep in mind that lifestyle inflation is not the devil, but it can be when inflation happens for the wrong reasons.

Lifestyle Inflation Events

I will just come clean, I have inflated my lifestyle a couple of times. However, I think they happened for the right reasons and they haven’t turned me broke. I have made some big commitments in longer time periods.

First of all, I am enjoying some computer games. I have been a hardcore gamer, but have fallen back to a more casual gamer. However, getting the best graphics in the newest titles on a PC is expensive. I have serval of times built or upgraded computer for +1.000 euros. Furthermore, before playing games they have to be bought. Computer games costs around 60 euros and some have additional DLCs and subscription services. Over the years, this has been the most lifestyle inflating expense of mine.

Secondly is my lovely cat. My girlfriend and I have been wanting a cat for a long period. Therefore, we eventually decided that getting a cat was the right thing to do. We made the calculations and we could afford insurance, food, veterinarian visits, litter, toys and everything else a cat needs. The cat costs us about 1.000 euros per year just to own. Then comes the cost of acquiring the cat, which is an expensive race cat (ragdoll) and all the one time expenses.

The last is watches. I have owned a total of 3 watches which I consider expensive. Long story short I got myself a watch when graduating college, one when graduating my bachelor and one during my masters. The second watch I sold for a profit after about half a year because I wasn’t wearing it. The first and third watch is still owned by me. The third watch has needed a repair when I purchased it. Totally the watches including repairs have cost me about 3.400 euros.

However, all three of these very lifestyle inflating expenses I got some serious quality of life in return. The gaming has allowed me to have fun with friends and been a good time overall. The cat is simply adorable, cuddly and sweet. There is nothing that a cat pouring when getting a cuddle. And my love for watches is indescribable, in simple terms I will never earn enough income to purchase the watches I would like to own.

Avoiding Personal Lifestyle Inflation

While I obviously have used a lot of money on some quite dumb stuff taking my income and position in life into consideration, I could have done a lot worse. My personal finances would actually allow me to both own a car and have exotic vacations.

However, I can get where I need to be on a bike within 20 minutes. Therefore, I see no reason for me to purchase a car, insurance, gas, and regular maintenance when I can get from point A to B on my bike.

Having a car would be very nice. Especially in the wintertime where it can be sub-zero degrees, rain and snow. However, I don’t value a car enough for its price compared to my income.

The vacations also seem overrated and something that people do to look important on Instagram and Facebook. Do not get me wrong, I want to travel just as bad. However, do not want to put my entire yearly saving into a 7 day trip to a place made for tourists (same food, people, etc. as we know it from home).

Conclusion

Lifestyle inflation should be avoided at all costs. That is not to say that it is never allowed to upgrade the lifestyle from time to time. However, a lot of people get the idea that they should spend an equal amount to what they earn. the only purpose of spending more than you earn is to show off. There is no other logical reason and it is putting families in great financial stress when emergencies arise.

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ThePoorInvestor
I am ThePoorInvestor and I am on a financial independence journey. I am investing in P2P-lending to create a high cash-flow return. I disclose my income, expenses, investments, and everything financially relevant.

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