Tuesday, July 27, 2021

How To Avoid Jeopardizing Your Financial Future With Lifestyle Inflation

Most people will spend more money if they have more money to spend.

A phenomenon that is often less obvious to most people is lifestyle inflation, otherwise known as “lifestyle creep”. It occurs when a rise in discretionary income, the amount available to an individual after making essential expenses, prompts an increase in living standards as luxuries become new necessities.

Many of us inadvertently fall into the trap of lifestyle inflation when your average expenses increase in the long-term.

Upgrading to a more reliable vehicle or moving into a larger house for your growing family are natural life expenses.

It’s not all bad though. A measure of lifestyle inflation is unavoidable and not entirely unacceptable. It is okay to reward yourself, however, you must avoid situations where subtle increases in your expenses become obstacles on your path to achieving your financial goals.

However, it’s always important to live within your means and wisely use your money. A financial surprise can make you go into debt or “forced” to work a low-quality job.

Financial literacy is an important aspect of learning what strongly impacts your quality of life. It affects your ability to navigate through economic downturns and your response to unexpected financial windfalls. Changes in financial fortunes happen to us in varying measures, influencing how we save, spend and invest. Without a plan, it becomes more difficult to resist increased spending: the urge to upgrade your cable subscription, enjoy fine dining, add more items to your cart, and add a few more luxuries to your travel experience. The list of possibilities is endless when you have more money to spend on optional items.  It all adds up quickly and when you adapt to your new lifestyle, it becomes more challenging to give up former luxuries that now feel like necessities.

For example, do you need to upgrade to the newest phone when the last year’s model is still in good working order? Or do you need to switch to a more luxurious car maker to fit in at the club?

This habit of constant upgrades can become unsustainable when a financial surprise arrives.

Here is how to manage lifestyle inflation:


Track your spending

Knowing how you spend each penny is essential to combating lifestyle inflation. If you haven’t done so already, track your spending using paper, a budget spreadsheet.

This practice makes it easy to track your inflows and outflows on a weekly or monthly basis.


Make a budget (and stick with it) 

Once you know where your paycheck goes each month, make a spending plan that helps you reduce your current expenses. This plan can also help you save for the “essentials,” including upcoming large purchases and retirement.

Figuring out the money ratios can be a challenge at first. As you follow your new plan, make adjustments as necessary to find your spending-to-savings mix.


Prioritize your important expenses

Avoiding lifestyle inflation doesn’t require a vow of poverty. One reward of hard work is earning a disposable income after your essential bills like taxes, health insurance, food, clothing and shelter. Disposable income is how you pay for vacation and those other non-essential purchases.

You have the flexibility to spend the remaining money as you wish. Deciding which expenses are most important to your family is a good starting point.

These are some of the budget categories you may prioritize:


  • Travel
  • Entertainment
  • Dining
  • Education
  • Investing
  • Saving for retirement
  • Paying off debt


After deciding which categories are most important to you, calculate your maximum spending amount. Look at how you can reduce expenses in the non-essential categories.

An example can be buying plane tickets each year to visit distant family. To afford the tickets, you need to reduce your daily spending.


Avoid random purchases

Making random purchases can be another easy way to lose track of your important financial numbers.

Set a monthly spending limit for those inevitable unplanned purchases.


Automate your savings

It can be easy to neglect your long-term money goals. But if you don’t intentionally save small amounts of money now, you may never achieve some goals.

Remember that compound interest can be your best friend. Diligently saving little amounts of cash from each paycheck can quickly turn into a vast fortune.


Creating a system for financial success is all about making intentional choices with our money. A good system will direct your money to the things that matter most and keep you on track to handling lifestyle inflation.

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