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How to Counteract Lifestyle Inflation

I first heard of lifestyle inflation in an article at the wonderful personal finance blog, Budgets Are Sexy, and it really got me thinking. Having gotten a raise at each new job I’ve worked at, shouldn’t my rate of saving increased exponentially.

If I was as financially savvy back then as I am now, I would venture to say that the answer would be yes. Then why am I not saving as much as I could be?

The answer is lifestyle inflation.

How Lifestyle Inflation Occurs

There are a lot of things that contribute to lifestyle inflation. Some can be avoided, like new cars, bigger homes, and more toys, while others are more of a result of moving on in life, such as getting married, or the increase in gas prices. The question then becomes, how can you counteract the effects of lifestyle inflation?

How to Counteract Lifestyle Inflation

In my experience, there is one simple answer to fight the effects of lifestyle inflation, and that is financial awareness. The fact of the matter is that most people associate getting a raise with buying more stuff. They don’t care or even realize that they are already in debt, and instead of putting that extra money towards paying it off, they simply raise their spending at the same rate as their earning.

You must first understand the fundamentals of financial responsibility like spending less than you earn and making your money work for you. Once you are aware of your current financial situation, you are able to make decisions necessary for it to improve.

What You Should Do With Your New Money

There are a few questions you should ask yourself when you are making more money, through a raise, inheritance, refund, or any other one of a hundred ways.

1. Can I use this money to pay off debt? If the answer is yes, do not hesitate! Pay off your debts and when you do, it’ll be like you got an even bigger raise because you’ll no longer have that monthly payment hovering over you like a hesitant alien abductor.
2. Do I really need a new (insert item here)? Sure you could afford a brand new car, but is your five year old Civic really that bad? If you really do want a new car, save the extra money and earn some interest until you can pay for it in full with cash. You will save on interest and have peace of mind knowing that you don’t have another monthly bill.
3. How can I use this money to better my future? Think about putting the money into an emergency fund (if you don’t have one), a savings or retirement account, or go for something with a higher risk/reward profile like purchasing stock. Never buy into the stock market with money you cannot afford to lose.

You may not have any debt and you may not need a new car, but remember, there is always room for improvement when it comes to saving for your future. Instead of spending it, find ways to make your new money earn you even more money and you’ll be way ahead of the game.

What things in your life have been the greatest cause of lifestyle inflation?