What is lifestyle inflation?

“The more you make the more you spend” is a familiar phrase that describes lifestyle inflation. Lifestyle inflation happens when your expenses increase along with the increase to your income. It can become perpetual; every time your salary increases, your spending increases accordingly.

It’s also referred to as “lifestyle creep” because the change can occur slowly, often without our perception. But when it takes hold, it can be a significant hinderance to your ability to get out of debt, save for retirement and/or meet other financial goals.

Lifestyle inflation does not discriminate - it impacts low-income and high-income earners. High-income earners may even be more susceptible to the temptation of extravagant purchases.

How and why does it happen?

An upgrade to your standard of living often goes hand in hand with an increase in your income. The desire to spend more or replace existing items with newer, more expensive versions is normal when income goes up. But a $10,000 to $15,000 raise can quickly disappear when used for a more expensive car payment, home renovations and a few other impulsive spends instead paying off existing debt, creating an emergency fund and/or saving for retirement.

You’ve worked hard to earn that raise. Rewarding yourself by spending more can be easily justified. However, rewarding yourself too much can have a negative impact on your financial well-being.

Becoming more laid back with more money coming into your bank account is also natural. You may no longer feel the need to bargain shop or track your spending, which can result in spending money you don’t actually have.

Psychological factors can also play a role in lifestyle inflation. The notion that the more you buy, the happier you’ll be, is prevalent but false. The social pressures to spend money to keep up with friends and family can also cause financial stress.

Warning signs it’s happening to you

A few common warning signs of lifestyle inflation include:

• living paycheque to paycheque
• spending more than you make
• relying on credit cards to pay your expenses (indicators are excessive credit card debt and making minimum payments)
• taking on debt to buy consumer products
• the depletion or absence of savings, such as your “rainy day” fund

If you’re experiencing one or more of the above warning signs, it may be time to re-evaluate your financial realities and spending habits.

How to prevent lifestyle inflation

Set financial goals

Financial goals are savings, investments, or spending targets you hope to achieve within a certain period of time. Your goals will vary depending on what stage of life you are in.

Set both short-term and long-term goals. Some examples of short-term include tracking your spending, paying off credit card debt, building an emergency fund and saving for a vacation. Almost all individuals and families will benefit from an emergency fund.

To set long-term goals, consider 5 to 10 years into the future — what you would like your bank account balance to be, where you plan to live, and where you would like to travel. Reaching your long-term financial goals requires breaking them down into smaller, short-term goals.

Both short-term and long-term goals should be categorized into money goals and process goals. Money goals include paying down debt and building up savings for future needs. Process goals are lifestyle changes, like tracking spending, setting a budget and reducing expenses.

When you are setting goals, make sure your goals are SMART – Specific, Measurable, Achievable, Realistic and Timely.

Track your spending and budget, budget, budget!

Knowing exactly what comes in and out of your bank account is imperative to battling lifestyle inflation. Keep track of the inflows and outflows of money on at least a monthly basis. If you struggle with income and expense tracking, there are many free apps that can help. Some of the of the apps automatically categorize expenses and have budgeting features.

Once you know where your money is going each month, sit down and make a budget with the aim of reducing your current expenses. A budget is a detailed plan that accounts for spending, saving and repaying debt. Your budget must be realistic for your situation.

Discretionary expenses such as eating out and entertainment are good categories to start with. They are not essential but can account for a large chunk of your monthly budget. 

Take time and research which budgeting method is best for you. You’ll also need to make regular adjustments to your budget. New expenses may emerge, while others may go away as you cut non-essential spending and pay down debt. Be patient with the budgeting process – over time you will begin to see your finances improve.

Understand needs versus wants

When you are preparing your budget, identify which expenses are “wants” and which are “needs”. The differences between the two may seem obvious, but sometimes distinguishing between them is difficult.

While food, clothing and shelter are obviously essential, some purchases that technically fit into these categories would qualify as non-essential. Think of an expensive meal, or name brand running shoes.

The best way to identify the difference is by asking yourself “Do I really need this?”, followed by “What would happen if I didn’t buy this?” and “Can I buy a more reasonably-priced version?”.

Avoid impulsive spending and mindless/casual purchases

Impulsive spending is a significant catalyst to lifestyle inflation. Distinguishing between wants and needs will help you avoid impulsive spending.

Some easy tips to prevent impulse purchases include:

• Remove credit cards from online accounts, thus preventing quick and easy purchases
• Unsubscribe from shopping emails to reduce the temptation to buy
• Institute a 24-hour waiting period to purchase larger items
• Break down how many hours you would have to work to make the money needed for the purchase
• Shop from a list when buying groceries and avoid shopping when you are hungry
• Repurpose clothing or borrow from a friend if you need an outfit for a special function

Resist the temptation to celebrate your pay raise by making big expenses, celebrate small instead. Thinking over every purchase will cut down on impulsive spending.

­Tackle/pay down debt

Many experts recommend starting with your most expensive debt – the debt that charges the highest interest rate. Typically, this would involve credit cards and payday loans. Next move on to student loan debt, vehicle loans or home equity loans (home lines of credit). Different methods exist for paying down debt — do some research and pick the method that best suits your personal situation.

Avoid taking on new debt

Each new amount of debt you take on makes it less likely you will get out from under your financial obligations. If you are considering borrowing, think about how it will impact your existing debt payments, your budget, and your ability to save for the goals you have set.

Consider relying less on credit cards and using cash (or your debit card) to pay. Avoid obtaining loans or lines of credit if possible.

Once you’ve paid off a debt, think about closing the account to avoid the temptation of the unused credit.

We’re here to help

While you may welcome an increase in your income, failing to plan for how you will manage additional funds may result in lifestyle inflation. Proper budgeting, setting financial goals, avoiding impulsive spending, and distinguishing needs from wants are your best methods to avoid it.

MNP has consulted thousands of individuals who feel crippled by debt, or who simply want to make a plan for a better financial future. Given the current era of economic uncertainty, overcoming debt through financial goals and plans has never been more crucial.

Contact MNP for a Free Confidential Consultation and learn your options today.