Lifestyle inflation is the tendency people have to spend more as they earn more. There are different factors behind what drives someone to spend more as their wealth increases, including social and personal milestones such as graduating from college and starting a full-time job. Having more disposable income means there is freedom to increase your spending on non-necessities.
Lifestyle inflation is also known as “lifestyle creep” because changes can occur gradually. Learn how lifestyle inflation works and how to prevent it from derailing your financial goals.
Definition and Examples of Lifestyle Inflation
Lifestyle inflation refers to a person’s upgraded standard of living following a rise in income. It encompasses the purchase of goods and services as well as experiences such as travel.
Income and spending are positively correlated—meaning as income increases, so does spending. Conversely, lifestyle deflation refers to a reduction in spending.
Alternate name: Lifestyle creep
As an example, you start your first full-time job in an entry level role. Your starting salary is $35,000. You make coffee at home every day and treat yourself to the occasional coffee-shop latte. After six months, you earn a well-deserved promotion and a raise that brings your net pay to $50,000. Now, a biweekly trip to the coffee shop is a daily habit. Whereas you used to shop secondhand, now you shop at upscale department stores.
If you want to cut expenses to reach your financial goals, you could skip lifestyle creep and dedicate disposable funds to a savings or retirement account. To fund those accounts, you could “deflate” your lifestyle and save the takeout and coffee runs for occasional treats.
How Lifestyle Inflation Works
Lifestyle inflation functions as an impulse to spend more money as wages increase, and it has the tendency to snowball over time. It can lead to an increased debt-to-income ratio to the point that you may end up owing more than you can pay back. This is because the rate at which spending increases from lifestyle creep is not necessarily proportionate to income; spending outpaces income in the case of many middle-class families.
At least 20% of middle-income households spent more than they earned in 2019.
A person who receives a raise may finance a luxury car or purchase their first home, increasing their debt-to-income ratio. Once what’s perceived as a luxury at a lower income level becomes attainable, it’s often deemed a necessity. As a result, spending on luxury goods increases as a person’s income rises.
Social factors also drive people to spend more. You may feel pressured to “keep up with the Joneses” and purchase a larger home just to match or exceed the homes your friends own.
Lifestyle inflation is at odds with the permanent income hypothesis, an economic theory that states people spend proportionately to their projected income level.
How To Avoid Lifestyle Inflation
Being mindful of your spending habits is a key to avoiding lifestyle creep. The Balance spoke with several experts for advice on resisting temptation to enhance your lifestyle after a rise in income.
Set a Budget
“One way to avoid lifestyle inflation is simply having a budget or monthly cash flow plan in place,” Kenny Senour, a certified financial planner at Millennial Wealth Management, told The Balance by email. “Knowing where your income goes each month not only gives you insight about how you’re spending money, but what you value as well.”
Wait on Impulse Purchases
Thinking about making an impulse purchase that you wouldn’t make if you were earning less money? Some tips for resisting the urge to buy unnecessary items are:
- Establish a waiting period for all impulse purchases; even 24 hours can help curb the desire to buy something you don’t need.
- Audit your non-budgeted spending every year to help you see how much money you spent on impulse purchases.
- Use the envelope method of budgeting so you aren’t tempted to use a credit card when you feel like spending money.
Knowing the difference between your wants and needs is crucial to curbing lifestyle creep.
Save or Pay Off Debts First
Although it may be appealing to splurge after a pay raise, it’s best to consider your financial goals.
“Some of my best savings advice is to put all of a new raise directly into savings, paying off debt, or other long-term financial goals,” Carter Seuthe, CEO of Credit Summit Payday Loan Consolidation, told The Balance by email.
Senour recommended increasing your 401(k) contribution to the same degree as your raise—meaning if you receive a 3% raise, increase your pre-tax contribution by 3%.
- Lifestyle inflation is when people upgrade their lifestyles upon earning higher income.
- Lifestyle inflation can increase a person’s debt-to-income ratio and lead to over-indebtedness.
- Experts recommend setting a budget and contributing to savings and retirement accounts to combat lifestyle inflation.