6 Proven Strategies to Avoid Lifestyle Inflation

Have you ever gotten the urge to buy a new car or rent a nicer apartment after getting a raise? Or used your yearly bonus to buy a new sofa for said nicer apartment?

Choosing to upgrade your lifestyle is a natural feeling. I mean, you work hard for your money so you should be able to enjoy some of the finer things in life right?

I definitely think so. But there is a fine line between reasonable lifestyle upgrades that add value to your life and randomly spending money on crap you don’t need just because.

While it is totally reasonable to choose intentional upgrades that are #worthit as your income increases, it is easy to go overboard with lifestyle inflation.

The key is to continue to live below your means as your income goes up. Even if that does include spending a little more on wants.

However, too many people get caught up in the trap of spending every extra dollar they make instead of making intentional choices with their finances.

It is possible to responsibly upgrade your lifestyle over time, but you’ll also want to be mindful of the things that truly make you happy and those that don’t.

This post will talk about 6 tips to avoid lifestyle inflation without sacrificing all the good things in life!

What is Lifestyle Inflation?

First off, what the heck is lifestyle inflation anyway?

Lifestyle inflation (also referred to as “lifestyle creep”) is simply spending more money as you make more money, meaning your savings rate doesn’t increase with the increase in income.

This usually happens gradually over time. 3% raise here, $2000 bonus here, 2% raise the next year, etc.

It’s tricky because you often don’t notice the gradual increase in income. Therefore, you also tend to not notice the gradual increase in spending.

Not all lifestyle inflation is bad, however.

I mean, you can’t realistically expect to be living the same lifestyle 10 or 20 years from now (hello, actual inflation making the prices of things go up).

But you also don’t want to get in the habit of treating yourself too often (especially to the point where you aren’t saving and investing for the future).

Examples of Lifestyle Inflation

Differentiating between “good” and “bad” lifestyle inflation has less to do with the actual purchase, and more to do with the intent behind it.

Leasing an Audi after getting a new job because “everyone at this company drives a luxury car”: bad lifestyle inflation.

Spending half of your raise on a vacation that you’ve been wanting to take and putting the rest into your 401k: good lifestyle inflation.

Spending your bonus on the latest iPhone when you can’t afford to max out your Roth IRA: bad.

Choosing to get your own apartment after living with roommates for 2 years (provided you can afford the rent): good.

Buying the most expensive lawnmower because you have to one-up Bob next door: bad.

See the difference?

Good lifestyle inflation involves spending on things that actually add value to your life.

Bad lifestyle inflation usually involves making purchases to impress others (or making decisions that you just flat-out can’t afford).

For real though, you don’t want lifestyle creep to be the reason you can’t retire or build wealth. That sweet new car is awesome until you realize that you have to work for an entire week just to afford the payment.

Here are some simple tips to help you avoid lifestyle creep and live below your means while making meaningful upgrades to your life.

How to Avoid Lifestyle Inflation

The real secret to combating lifestyle inflation is building good money habits and understanding what really matters to you.

Here are 6 strategies you may want to consider as you balance enjoying now with saving for the future:

1. Get Intentional

The cool thing about personal finance is that you get to choose how and where to spend your money!

The sweet spot is spending where it actually adds value to your life.

Sometimes, spending more money is totally worth it!

And sometimes, you make purchases that you regret.

Start differentiating between the two every time you make a purchase. Note how you feel days, weeks, or months after making a purchase.

You’ll start to become more intentional with your spending!

Think about how happy you are with your current lifestyle. Would spending more money increase your happiness or satisfaction?

If I started spending twice as much money on unnecessary purchases, I don’t think I would be twice as happy!

Now, I can’t tell you what’s “unnecessary” for your life, since ~personal finance is personal~ and all.

But for me, those things are fancy makeup, getting my nails done, and designer bags. I seriously get almost all of my clothes from TJ Maxx or the outlet mall!

But what I do love spending money on is experiences, eating out with friends, and home decor.

Figure out what’s worth it to you, and consider making more room in your budget for those items. Cut from areas that don’t matter as much!

2. Always Pay Yourself First

The phrase “pay yourself first” often gets confused with treating yourself. I want to disclaim that paying yourself first does not mean going on a shopping spree, buying a new car, or getting your nails done.

Pay yourself first by making contributions to your retirement accounts and savings before spending money on wants.

An example of this is increasing your 401k contributions after getting a raise. Your 401k gets paid before your bank account, therefore you’re paying yourself first.

Getting in the habit of making that Roth IRA contribution before going to brunch ensures that future you gets taken care of before current you spends on luxury purchases.

3. Avoid Debt

The truth is, if you can’t afford to pay cash- you really can’t afford it.

This is especially important to keep in mind with large consumer goods such as sofas, appliances, and yes, cars.

Our society has gotten away from looking at the total cost of something and instead focusing only on the monthly payment.

This is a dangerous mindset to get into. Financing causes you to spend more money on something than you originally planned because you hardly notice a difference in the monthly payment.

Cue the car salesmen preaching, “Moving up to the Limited trim only adds $30 to your payment!”

But what they don’t tell you is that the higher trim level adds $7000 extra to the total purchase price, and you’ll be paying interest on that extra $7000 as well. And you might not even care about the features on the higher trim level!

Yes, I also recommend to avoid interest-free financing!

I am NOT saying that you should never upgrade your car, furniture, smartphone, or appliances.

However, I am recommending that you DO NOT GO INTO DEBT to upgrade your car, furniture, smartphone, or appliances.

Here’s my suggestion: Create a sinking fund for the large item you’ve been wanting and save up for it over time.

Giving yourself time to save and pay cash will prevent you from rushing into a purchase that won’t ultimately add value to your life.

And you’ll avoid debt and interest payments!

Because having a “couch payment” really is pretty sad and embarrassing.

4. Automate, Automate, Automate!

The easiest way to beat lifestyle inflation is to automate your savings and investments (read this post if you want to get started with saving for retirement!)

Here are a few of my favorite ways to do this:

• Bump your 401k contribution up a percentage point (or more) each time you get a raise
• Set up autopay for all of your bills on the same days that you get paid (no more shopping sprees resulting in wondering how you’ll pay rent this month)
• Automate your Roth IRA contribution to come out the same day you get paid. (Do this for the same reason listed in the previous point)
• If you struggle with impulse spending, try having two separate checking accounts (one for wants and one for bills/needs). You can automate your paychecks to deposit different amounts into each account.

You’ll spend less time worrying about paying bills on time, checking your bank account, and feeling guilty for spending on wants.

Automate all the important stuff and spend what’s left over guilt-free!

5. Budget with Percentages

Probably my favorite way to budget any extra money that comes my way is using percentages!

In this method, you allocate a percentage of that money to give, save, and spend. You get to decide those percentages for yourself.

My husband and I used this method after our wedding to allocate the cash gifts we recieved. It’s a great way to keep the balance in your spending while also being intentional!

If you get a yearly raise at work, multiply the percentage by your current salary to get an idea of how much extra money per year you’ll be making.

Then you can figure out how much of that amount you want to give, save, and spend.

Budgeting with percentages like this gives you some freedom to spend on things you want now, while also being responsible and saving for the future.

It’s all about balance people!

6. Practice Gratitude

Did you know that if you have just a little over $4000 to your name, you’re richer than half of the entire world?

Take a second to digest that.

These days, to be born in the United States is a huge privilege. We have so many freedoms and opportunities here that so many people don’t have.

This hit me the other day as I was driving into work one morning. At the time, it was a few days after the US pulled out of Afghanistan that caused so much devastation on the other side of the world.

I almost felt guilty for how easy my life is in the US.

My biggest “problems” in life are so trivial compared to what people in other countries go through every day.

“How was I lucky enough to be born in the United States?”

“What did I do to deserve an amazing childhood and family? Good health? Opportunities to go to college and get a great job?”

I don’t have to worry about where my next meal is coming from. I have a safe apartment in the suburbs. My parents are still happily married. I am happily married to an amazing man.

There is so much to be grateful for, ya’ll. Even on the hard days.

Most of us come home to a warm shelter, food in the fridge, and live in the best country in the world where there are endless opportunities.

Take a second to be grateful for the things you do have, even if they are old and not flashy.

You might end up wanting less stuff than you thought.

The Real Cost of Lifestyle Inflation

Figuring out the “real” cost of a decision means considering what else you could have done with that money, aka opportunity cost.

Learning about opportunity cost changed the game for me when I started becoming more mindful of my spending.

What is the best alternative that you could have done with the money you spent on X?

For most people, it’s investing in the stock market (usually in a retirement account). Because of time and compound interest, that money will be worth exponentially more in the future.

We want to consider the future cost of our current decisions when choosing to upgrade our lifestyles. Not doing this is one of the biggest money mistakes I see people my age making.

Here’s a fun game you can play next time you want to splurge on something: plug the cost into a compound interest calculator at an 8% annual return and see what that money will be worth in 10, 20, or 30 years!

Here’s what having a $500 monthly car payment for 20 years really costs you:

That’s $285,000 that you WON’T have in your retirement nest egg. If you have more than 20 years until retirement, the true cost is exponentially higher.

This is why it’s so important to choose our lifestyle upgrades intentionally and to always live below our means. Make sure that what you’re spending your money on actually adds value to your life!

Let me know in the comments what is #worthit to you, and one thing that isn’t!

Always remember to spend intentionally, live below your means, and invest early and often.

-Megan