Seven ways to Avoid Lifestyle Inflation

Lifestyle inflation, or lifestyle creep is the phenomenon of upgrading one’s lifestyle as income rises. When an employee gets a salary hike, it’s only natural to want to spend on something exquisite or luxurious. Similarly at a lower income level, people tend to think thrice before making any expenses. But at a higher income level, there is a chance that one might only think twice, or might not even give it a second thought. This tendency to splurge when your disposable income rises is because you feel justified in spending that additional amount, since you earned it (literally).

This is not always necessarily a bad thing. An occasional luxury day, or an upgrade from time to time can be a great source of motivation. However, constantly upgrading for the sake of “fitting in” is detrimental. It may start off small, but victims of lifestyle inflation have found themselves constantly living a life that they cannot afford.

Lifestyle Inflation is a trap that is easy to fall into, but difficult to get out of. Your spending habits can easily spiral out of control, and by the time you realise that you need to make a change, it can be almost nearly impossible to get out of it. Here are a few preliminary ways to avoid falling into the trap:

1. Track your Spending:

In the long run, smaller expenditures can add up to a very expensive lifestyle. As and when you make decisions about your budget, consider the looming threat of lifestyle inflation. When you are thinking about adding a new expense to your life, consider whether it is a necessary expenditure or not, whether it will add long term value to your life and what is the opportunity cost.

You are generally notified if there is going to be a rise in your income. Take the time leading upto the date you actually receive that increment to decide what part of your budget you will add that incremental amount to. Track all your expenditures, and add this incremental amount to the respective category in the ‘future spending’ part of your budget.

Expenditure tracking apps such as GoodBudget, YNAB and Monefy have grown in popularity in the past 5 years. If you are not comfortable with apps due to a concern in privacy matters, spreadsheets have also proven to be an effective tool.

2. Prioritise your necessary expenditures:

Any amount earned and utilised can be categorised into one of three categories- necessary expenses, luxury expenses and savings. The typical rule of thumb is to maintain a 50:20:30 budget for your earned income. It is vital to ensure that you spend on necessary items before spending on any upgrades or luxury items. Make a budget that incorporates all expenses. This will help make sure you have enough saved for essential expenses such as mortgage payments, groceries or insurance premiums.

As and when repayments and income proportions change, adjust your budget accordingly. This will not only give you clarity on your financial planning, but also leaves you more potential to spend in the future.

3. Ensure you have enough savings:

One of the main objectives of financial planning is to ensure you have enough for a rainy day. Religiously contributing to your savings budget can also help ensure you have enough savings for an emergency.

Automating your savings is a viable option to ensure that you have enough saved up, and makes it easier to reach the goal of financial independence. This allows you the flexibility to either opt for your dream career, take a sabbatical from work or retire early.

4. Increase your investments:

It may seem tempting to spend that entire incremental amount on a major luxury vacation, or the latest iPhone, but stop to consider the value of compounding. The more you invest, the greater potential for future financial independence.

5. Tackle debt head on:

Debt is one of, if not the most expensive elements in your budget. Getting debt obligations out of the way before spending on other relatively less necessary items has many benefits, such as more potential to spend freely in the future, a better credit score and a better planned lifestyle.

6. Splurge consciously:

While I do advise that you be cautious of your expenses, I definitely do not recommend you continue the same lifestyle all throughout. The occasional splurge has many benefits, the most important one being a great motivator. Splurge, but make it worth it.

7. Ensure you’re surrounded by money-wise people:

One of the main reasons for lifestyle inflation is peer pressure. We are so driven by validation, that we will buy expensive items to seemingly try and “fit in” with society. By surrounding ourselves with people who are smart with their expenses, we can avoid falling into a trap, and reach closer to our goal of financial independence.

It sounds cliche, but the phrase ‘Prevention is better than Cure’ is applicable in this situation. In the short term, it may seem slightly frustrating to have higher disposable income and not be able to spend lavishly. But the long-term benefits of spending cautiously outweigh the short-term pleasures.