How to Avoid Falling Into the Lifestyle Inflation Trap | theSkimm

How to Avoid Lifestyle Inflation

Published on: Sep 4, 2020fb-roundtwitter-roundemail-round
Luxury items
The Story

We don’t know who needs to hear this, but you don’t have to spend more money just because you earn more money. (Or, you know, have more to spare because a global pandemic has you commuting, traveling, and going out a lot less.)

I don’t think I like where this is going.

Hear us out. Upgrading your spending habits when there’s more money to go around is called lifestyle inflation. It turns things you once thought were nice to have into can’t-live-withouts. Think: a house or apartment with (a lot) more bedrooms than people who live there, yearly dream vacations, luxury cars, new shoes for every season, etc.

What’s wrong with that if I can afford it?

Spending more and more makes it harder to build wealth and reach your big financial goals. Catch, meet 22. Because the more money you spend on needs, the more savings you’ll need in case of a big lifestyle deflating moment, like getting laid off. And the more you’ll need set aside for retirement to maintain your standards.

Related: theSkimm’s Guide to Your Financial Plan B

How do I know if I’m guilty of lifestyle inflation?

It can be hard to notice, especially because it typically happens slowly over time. Hence its other name: lifestyle creep.

But there are two easy ways to evaluate whether you’re spending within your means. One, check out your credit card statements. Overspending could look like carrying a balance from month to month or borrowing from savings to cover the bills. That can lead to unnecessary debt and living paycheck-to-paycheck forever. Two, look at how much you’re saving. When you make more, you should save more.

Okay, how do I save more?

Follow these tips for keeping yourself and your wallet in check:

  • Give new money a purpose ASAP. Whether it’s a raise, bonus, tax refund or gift, being intentional about what you’ll do with extra cash can help you avoid wasting it. Some ideas: make bigger loan repayments, bulk up your emergency fund or step up your investing game. Pro tip: set up auto-transfers to savings and investment accounts to take willpower out of the equation.

  • Think in percentages, not dollars. It’s normal to want to upgrade some parts of your life, especially as your family and goals change. Use the 50/20/30 budget and some rules of thumb to guide your choices. Experts recommend spending about 30% of your gross pay (aka what you earn before taxes) on housing. No more than 15% on a car payment.

  • Budget for splurges. Sounds counterintuitive, but treating yourself can actually help you stick to your spending plan. The 24-hour rule – where you wait a full day before buying something you want but don’t need – is a good way to make sure you live without spending regrets.

  • Stop scrolling. It’s easy to feel sad about your own living situation when you see your old roommate’s Cribs-style mansion tour on Instagram. But spending to keep up with others can put you on a dangerous path to lifestyle inflation. Instead, try to focus on what’s important to you. And what savings habits you’ll need to get it.

Related: How to Save Smarter

theSkimm

Lifestyle inflation can sneak up on you. Making conscious spending choices, automating good habits, and keeping your goals top of mind can help you stay on track.

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Skimm'd by: Ivana Pino, Elizabeth Smith, and Elyse Steinhaus