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Let’s tackle the topic of lifestyle inflation. You may have never heard of it, but you’ve probably seen it play out with your friends and family a time or two. It’s an all too common tendency to get wrapped up in. Unfortunately, lifestyle inflation can wreak havoc on your financial wellbeing, lead to career stress, cause cyclical debt, and force even high earning professionals to live paycheck to paycheck.

Now, we’re big believers in getting the most out of life. You work hard and should enjoy life to the fullest. Otherwise, what’s the point, right? While I tell clients this almost every day, I also tell them that they need to take care of their financial affairs too. If you don’t, letting lifestyle inflation get the best of you will lead to an overall financially unwell existence, regardless of how much hits your bank account each month.

What is lifestyle inflation?

Lifestyle inflation is the habit of increasing your spending at or above the rate you increase your income. As people have more and more money, they decide to spend more frequently and buy more stuff. Letting your spending get out of hand can easily result in unpaid bills, loads of debt, and the inability to ever achieve long term financial goals.

Here’s an example: Your college buddy tells you he finally got that promotion. New job title, new responsibilities, new office, and best of all, a big bump in pay. The planning begins! He’s going to pay off his credit cards, buy a new car, and take a trip to Europe. He’s finally made it to financial freedom. Or has he? A year later, your buddy has that new ride, went on a couple fantastic vacations, splurged on a new wardrobe, and even moved into a fancier apartment. He’s also once again buried in credit card debt and is still having trouble keeping up with his monthly bills. His uptick in lifestyle couldn’t keep up with his uptick in salary.

Who can be affected?

Anyone! Everyone can experience lifestyle inflation. It’s very prevalent in cities with high cost of living, but don’t count yourself out if you’re not a city dweller. You could fall victim to increased spending anywhere.

Lifestyle inflation usually happens when there’s a big increase in how much money people have around. Recent college graduates tend to suffer the most. The change from living the penny-pinching college life to having a real salary can be drastic. It’s also common when people get a bonus, a raise, or an unexpected inheritance. It’s so tempting to splurge on luxury items when you suddenly have cash on hand.

Why does it happen?

There are many different factors at work here. It’s human nature to want bigger and better comforts. Whether it’s upgrading your housing, buying new work clothes, or getting a new car, we all want to show others that we are doing well. It’s natural but can be very dangerous for your wallet. Social media has made this need to show off our success even more common. We’re constantly being flooded with targeted ads displaying all that life has to offer if we just had some more money, and pictures of our friends in fabulous places surrounded by luxury goods. The “keeping up with the Joneses” social media mentality is very real these days. Click here for more on that!

What can you do to keep lifestyle inflation at bay?

It’s important to create a solid budget within your means and stick to it. This doesn’t mean you need to pinch pennies to make ends meet, save everything you earn, and constantly track your spending. Just try to watch your daily spending and do what you can to avoid large scale purchases you weren’t planning on making before that lump sum hit your bank account. We want you to be able to treat yourself every once in a while. Just make sure that “every once in a while” doesn’t end up being “all the time”. Be responsible about working toward your financial goals first. Then you’ll be able to fully enjoy yourself without the guilt or worry.