Money Management

Lifestyle Inflation: What It Is and How to Avoid It


Hey there, future financial wizards and savvy spenders! It’s the Wellness Turkey, your trusted guide to designing your best life. Today, we’re diving into a topic that can have a significant impact on your financial well-being: lifestyle inflation.

What is Lifestyle Inflation?
Lifestyle inflation, also known as lifestyle creep, is a sneaky financial phenomenon that can catch you off guard if you’re not careful. It occurs when your spending gradually increases as your income rises. In simpler terms, as you earn more money, you tend to spend more money on non-essential items, upgrading your lifestyle along the way.

Picture this: You start your career with a modest salary, living within your means, and managing your expenses wisely. Over time, you receive salary raises, bonuses, or promotions, increasing your income. Instead of saving or investing these extra funds, you find yourself upgrading your car, dining out at fancier restaurants, taking luxurious vacations, or buying designer clothes. While these upgrades may seem enjoyable at first, they can lead to financial trouble down the road.

The Danger of Lifestyle Inflation
Lifestyle inflation can be a slippery slope that undermines your financial goals and long-term security. Here’s why it’s essential to be aware of its dangers:

Savings Erosion: When you succumb to lifestyle inflation, your savings rate typically takes a hit. Money that could have been saved or invested for your future ends up being spent on immediate gratification.

Reduced Financial Freedom: As your expenses increase, you become financially tied to a higher cost of living. This can limit your freedom to pursue other goals, like early retirement, starting a business, or pursuing passions.

Increased Debt: Lifestyle inflation can lead to excessive debt. You might start relying on credit cards or loans to maintain your upgraded lifestyle, accumulating debt that can be challenging to pay off.

Stress and Financial Insecurity: Living paycheck to paycheck due to inflated expenses can cause stress and anxiety. Financial insecurity becomes a constant worry, impacting your overall well-being.

My Lifestyle Inflation Story
Let me share a story from my own journey, one that I hope will resonate with you, the Gen Z Visionaries. As I progressed in my real estate career, the allure of lifestyle inflation began to take hold. I found myself in a pattern of upgrading and spending, a cycle that seemed never-ending.

It all started with a car. I traded in my trusty old Lexus sedan, affectionately referred to as a “boat” by a friend, for an Audi sedan. Soon after, I traded up again, this time to an Audi SUV. And then came the pinnacle of my spending spree: a Tesla electric car. Alongside these car upgrades came a slew of designer purses, clothes, jewelry, and accessories. I even indulged in not one but two electric bikes. It was endless spending, and I was caught up in the allure of material possessions.

But, as they say, the turning point often arrives when you least expect it. For me, it happened on a sunny summer day in 2021 while I was on vacation, basking on the beach. There, I stumbled upon a book that would change my perspective forever: “Minimalism” by Ryan Nicodemus and Joshua Fields Millburn. That day, something within me shifted, and I had a moment of clarity. I began to recognize the insidious nature of my own lifestyle inflation.

Shortly after, I discovered that these same authors had a show on Netflix called “The Minimalists, Less Is Now.” I wasted no time and watched it with my husband. The revelations continued as I binged on “Tidying Up with Marie Kondo” and other similar content. It became evident that I had been ensnared by marketing ads, driven by the urge to outdo my friends and family, and accumulating possessions that ultimately added little value to my life. In fact, no matter how expensive those items were, I often grew tired of them after just a few months. And so, the cycle continued, a cycle I was determined to break free from.

Today, I’ve undergone a transformation. No longer do I buy expensive designer items. Instead, I redirect my hard-earned money towards experiences, my retirement fund, and meaningful moments. I prioritize holidays with loved ones and engage in activities like playing pickleball, which not only keeps me active but also costs nothing. It took me until my 50s to recognize the pitfalls of lifestyle inflation, and I’m here to ensure that you don’t fall into the same trap.

How to Avoid Lifestyle Inflation
The good news is that you can prevent or mitigate lifestyle inflation with some mindful financial strategies. Here’s how:
Set Clear Financial Goals: Define your financial objectives, such as saving for retirement, paying off debt, or building an emergency fund. Having clear goals will keep you focused on your long-term financial well-being.

Create a Budget: Develop a budget that allocates specific amounts to essential expenses, savings, investments, and discretionary spending. Stick to your budget, even as your income increases. (please see blog on Budgeting)

Automate Savings and Investments: Set up automatic transfers to your savings and investment accounts. This ensures that a portion of your income is saved or invested before you have a chance to spend it.

Avoid Lifestyle Creep: When you receive a raise or windfall, resist the urge to immediately upgrade your lifestyle. Instead, channel the extra income into your savings or investments.

Re-evaluate Expenses: Periodically review your expenses on your tracker and identify areas where you can cut back or optimize. This can free up more funds for savings and investments.

Delay Gratification: Before making significant purchases or lifestyle upgrades, give yourself time to evaluate their long-term impact on your finances. Delaying gratification can help you make more informed decisions.

Focus on Experiences: Instead of constantly upgrading material possessions, invest in experiences that bring lasting happiness and fulfillment. Experiences, like vacations and spending quality time with loved ones, often provide more value than material possessions.

By being mindful of lifestyle inflation and implementing these strategies, you can maintain financial stability, achieve your goals, and secure your financial future. Remember, it’s not about depriving yourself but making conscious choices that align with your financial objectives.

Stay tuned for more financial insights and tips from the Wellness Turkey. Your best financial life is within reach, and together, we’ll design it with purpose and intention.