What is lifestyle inflation?

Lifestyle inflation

Lifestyle inflation is the unnecessary expansion of spending to match an increasing income.

Most people can probably recall that as a student or perhaps at the very beginning of our working career we managed to live on almost no money at all. Life was pretty good and while sacrifices had to be made because of limited funds, life went on.

For most people, landing a full time job or getting their first major raise was a signal to get a new set of furniture or move into a bigger house. Maybe it justified taking a car loan out because “I need to be able to get to my new job!”, but almost invariably our spending increases as we have more income.

This seems to accord with the most recent data from the U.S Bureau of Economic Analysis suggesting a personal savings rate of only 4%. As part of our modern society it seems extremely normal to spend almost all of the money we have available. The baffling thing is that almost everyone has experienced a period in their life where they have been forced to cut back spending, perhaps through unemployment, the birth of a child, illness or an unexpected emergency.

We know how to be frugal. But we choose not to be.

There is not necessarily any need to return to the extremely austere life of a university student subsiding on noodles alone, but if we are to retire early and break out of the cycle of wasting our entire productive adulthood at work, we need to combat lifestyle inflation.

Signs that you are suffering from lifestyle inflation

Early retirement vehicles aren't like this

If one or more of the following lifestyle inflation symptoms applies to you, you might need to consider whether your spending is holding you back from attaining an early retirement.

  1. If you receive a large windfall, you think immediately of something to buy with it
  2. You always hold a credit card balance
  3. You live paycheck to paycheck
  4. You feel the need to get the latest device or consumer product when the item it replaces is still working perfectly
  5. If you regularly suffer from ‘buyers remorse ‘
  6. If you care about matching the spending of someone else
  7. If you replace your car while your old one is still working
  8. If you take on debt to buy consumer products
  9. You associate spending with happiness, but normally don’t feel any lasting happiness after a purchase
  10. You worry about what is fashionable

Retiring early from work is not an easy task, and it’s made absolutely impossible if you suffer from any of the above. If you recognize any of the above symptoms and aspire to retire early then you need to consider whether the benefit you are getting out of your spending habits would exceed an entire adulthood of freedom from work.

For some people it might be, but for me, having the latest jeans that a celebrity is wearing is almost laughably unimportant when compared to financial independence. 

How to combat lifestyle inflation?

Lifestyle inflation

The first step is to identify a spending threshold above which you resolve to save every last penny in a long term investment account. I like to set this number as a percentage of net income (after tax and compulsory payments) based on how far away your planned early retirement is. 

  • A 25% spending rate means that every year of spending a quarter of your salary you are saving 75%, or three years worth of living expenses at that spending rate.
  • A 50% spending rate means for every year of work you have earned a year of retirement.

As I noted in my article on reducing spending v increasing income, here are some of the effects on early retirement times if you achieve an extreme spending rate:

10% of income = free in 3 years

15% of income = free in 5 years

20% of income = free in 7.5 years

25% of income = free in 10 years

If you decide, like I have, that a 25% savings rate is achievable or is a good aspiration, then work out for you what that means in dollar terms and then use a good budgeting or tracking software like YNAB or Mint. Then stick to it!

It normally requires reversing many of the problems I have identified above. Which is essentially making the realization that spending more isn’t linked to more happiness and that it is not possible to keep up with the spending of other people, and that it is OK to not have the latest gadgets. The concept of enough is discussed in detail in Your Money or Your Life and really is a must read book for anyone aspiring for an early retirement.

Your Money or Your Life - the fulfillment curve

When you set a monthly target, try to set up an automated payment to a long term investment account or perhaps an automatic payment into your mortgage (if you live in a country with higher interest rates than the US). Automated payments timed to coincide with being paid are a very effective way of forcing you to be frugal. Pretend that the amount left is genuinely all you have left to spend, like back at college or back when you were in your first job.

I genuinely believe that spending less doesn’t mean enjoying life less. Take a look at the changes you have made in your spending as your income has increased and genuinely ask yourself whether you have seen any increase in net happiness. If you haven’t, or the increase in happiness is not proportionate to the increase in spending, think about trying to do something about your lifestyle inflation.

Recognize that it’s standing in between you and a life of travel, of doing what you want, of helping others without worrying about money and of financial independence.

The link to "Your Money or Your Life" is an affiliate link to amazon. If you  buy the book using my link you will be financially supporting my blog. Thank you!
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What is lifestyle inflation? — 24 Comments

  1. This is great! I totally agree that lifestyle inflation can sneak up on someone easily. It has happened to us several times without us really realizing it. It’s hard not to buy bigger, nicer stuff when you can finally afford it.

    I just have to stop and think about the things that I really want- to travel the world, to be completely debt free.

    • I agree that it’s a hard thing to keep on top of because it’s so normal to everyone else. Doing the hard stuff will get us all to financial independence though, so it’s worth it long term.

  2. Lifestyle inflation is a tricky thing to avoid. I think it is probably the biggest cause of people not being able to save. It is just too easy to increase your lifestyle rather than save your money. Love the graphic, btw.

    • Completely agree Greg. Once you get used to saving and living on less than you earn, it’s pretty hard to keep up with the Jones’. The desire to keep hitting higher and higher savings numbers helps keep lifestyle inflation in check.

  3. I generally agree with you that lifestyle inflation is bad, but at the same time it’s sometimes inevitable. I would never have bought a dog while in college because I couldn’t really justify having one. Now, with a higher income I can justify the expense, but it could be categorized as “lifestyle inflation.” I think sometimes the life we lead at lower incomes is somewhat unsustainable and we inevitably change lifestyles as income increases.

    • No doubt – there are some things that are too valuable to avoid simply to keep spending low. Pets, children, travelling etc all make the list for me. It’s about making sure our spending is always inline with our true interests rather than being tricked into buying things we don’t need on the theory it will make us happier.

  4. I agree that spending less does not mean that you’re enjoying life less. We allow ourelves to get caught in the trap of believing that things will provide us happiness and that it HAS to be now. Sadly, that is not the case. It requires discipline and a commitment to not going crazy.

    • We live in a time when everything is almost too convenient and have forgotten the virtue of patience – delayed gratification is almost always more satisfying. I genuinely enjoy living frugally more than I ever did spending more than 100% of my salary.

  5. Where did you get that picture of my closet at the top? :) I agree – lifestyle inflation is a silent killer that most of us never realize is there until it is too late. With every new raise or income I think it is important to find a purpose for that new money so that your expenses don’t find it for you!

    • That’s a great way of putting it. The best way I’ve found is to be satisfied with a set level of spending and making sure it doesn’t arbitrarily go up, or go up in response to an increase in income. A regular increase in spending should be justified and well thought out in advance.

  6. Nice post. I was actually discussing lifestyle inflation with my sister today. She was telling me how she was getting a 3% raise at work and I suggested that she pretend that she never received the raise and instead automatically have it going towards her debt, savings, etc. I guess I am kinda lucky that I was already beginning to become more frugal with my spending before I got a “real” job and began to make a decent income. Still a long way though from complete freedom but it feels good to know my goal.

  7. Great post… I love the graph as well! I like the question you ask about receiving a windfall! Part of me does always think ‘What can I spend it on’ but these days it is more along the lines of what can I invest in! Fancy cars are nothing but p**** compensators!

    • Haha, absolutely right. I really, honestly couldn’t give a shit about driving a luxury car. I’d feel like an impostor. Give me a weekend of fishing and camping any day. The simple pleasures really are better imo

  8. Just last month hubby and I were considering upgrading to iphones.. the iphone 4 was free with a 2 year contract however we the plan would have cost us around $40 more per month…since we both landed new jobs with substantial pay increases we thought about it. Ultimately decided to keep our cheap cell phones for another 2 years and save the money.

  9. Excellent post! I constantly hear people saying I’m going to buy this and this when they get their pay increase. I have a totally different mind set. I think yay, more money to save and more money to invest. I guess frugal/money conscious people have a completely different way of thinking.

    Say no to constant upgrades!

  10. Very well said! When my wife and I had nothing and I finally got a job, it was awesome to buy clothes without holes in them and get a house…but then we reached that point where it was enough. And we both just knew when we got there. Which is fortunate for us, I guess

  11. Great commentary on our hyper-consumerist society. It’s so easy to get wrapped up in having the latest stuff that we forget there is a bigger picture sometimes. I recently purchased a home, and I feel content in my lifestyle and level of savings. That’s not to say that I don’t want to make more money for investment and saving – I do. Rather, it’s to say that my lifestyle is happy and I don’t need to make more to enjoy my life.

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