Introduction
When money is available, people will spend it. And when they have more money, some people spend it more. Think about a recent college grad who has a new job and pays $1,100 a month to rent a nice apartment. When their pay rises four years later, they might start looking for a better apartment that costs $1,900 per month.
The new apartment is in a building with greater amenities that is situated in a cooler, hipper neighborhood. The former apartment was adequate (good condition, decent location, nice neighbors). Even though they had a comfortable place to live in the first apartment, they upgraded to a more expensive one because they could, not because they needed to.
When a person moves up the corporate ladder and earns more money, their monthly costs often increase as well. This phenomenon is known as lifestyle inflation.
If this occurs to you, it could be an issue since, while you might still be able to pay your bills, your capacity to use your greater wage as a means of wealth accumulation is constrained.
Why Lifestyle Inflation Happens
One of the causes of people spending more when they have more money available is the age-old desire to keep up with the Joneses. People frequently feel pressure to follow the spending patterns of their friends and coworkers:
Even though your current set of wheels gets you from point A to point B just fine, you can feel pressured to upgrade if you see people driving BMWs.
When you first moved into your dream home on one side of the city, you might not have felt the need to move because so many of your friends lived in other areas.
You’ve always coveted other people’s possessions, vacations, dining habits, and cultural experiences.
To maintain their look of riches, the Joneses may be paying off a significant amount of high-interest debt over several years. They may not actually be wealthy, and their apparent wealth does not necessarily indicate that they are making wise financial decisions.
Another contributing factor to lifestyle inflation is a sense of entitlement. You put a lot of effort into earning your money, so you feel good about treating yourself to the finer things in life. While this is completely natural, rewarding yourself excessively for your efforts can be harmful to both your present and future financial well-being.
When Spending More Makes Sense
As time goes on, both your career and personal circumstances will change. This implies that you will probably have to spend more money on things like a car or your wardrobe that you may have previously avoided altogether. A certain level of lifestyle inflation is to be expected as your responsibilities to your family and job change.
Therefore, there may be instances when it makes sense to increase your spending in particular areas. For instance, you might need to employ someone to help with housework or duties if a recent promotion at work necessitates longer hours or more travel. Alternately, you might need to relocate to a larger house to make room for your expanding family.
If you can afford it, spending a bit more to raise your standard of living could also make sense. As your career progresses, you might not have time to clean the house and mow the yard. Spending more money and hiring someone to do it may make sense even though it is an additional expense in order to free up some time to spend with family, friends, or engaging in an activity you enjoy.
Possessing some downtime can increase your productivity at work and support a healthy work-life balance.
Avoiding Lifestyle Inflation
Although some lifestyle inflation may be unavoidable, keep in mind that every choice you make today about your expenditure will have an impact on your financial condition tomorrow. Additionally, boosting your spending today can make it more difficult to break the habit later.
You just spent your entire retirement fund on those $800 Jimmy Choo heels, so when they break you might feel pressure to buy a new pair. Consider whether you can afford to spend that much money on shoes. Should you even if you can?
Even while your earnings may improve significantly, it’s still possible—and actually rather simple—to return to your previous lifestyle of living paycheck to paycheck.
The tendency of spending more money than you earn can quickly develop as a result of lifestyle inflation. Just to sustain your new (inflated) level of living, you purchase more goods than you actually need.
Spend or Save?
Let’s say you spent a lot of money on that $800 pair of Jimmy Choos (or higher-end phone) when you were 25. But suppose you had chosen to invest that $800 instead. When you reach 65, that $800 will be worth $5,632, assuming no further investments and a 5% rate of return (ROR). Even though the shoes are fantastic, would you rather have about $6,000 more as you approach retirement or fantastic shoes for a few years?
Needs and Wants
Even while certain purchases are required, it always pays to distinguish between needs and wants. Keeping needs and desires in mind can help you make better financial decisions and prevent excessive lifestyle inflation. You should also be objective and honest when determining whether a possible purchase is a need or a want.
Investing or saving a good portion of your rising earnings is another approach to curb excessive spending when your income rises. For instance, if your monthly income has increased by $1,000, you should aim to save or invest an additional $750 by increasing your 401(k) contribution, adding to your emergency fund, or funding your individual retirement account (IRA). You won’t be able to spend the extra cash on unimportant items if you put it away.
What is lifestyle inflation?
When an individual’s income increases, they tend to spend more, a phenomenon known as lifestyle inflation or lifestyle creep. Their expenses and duties increase along with their available income, often dramatically. Therefore, despite earning more money, lifestyle inflation might make people’s financial situations worse.
How can I stop lifestyle creep?
There are a few ways to avoid falling into the lifestyle-creep trap after your income increases, but it’s not always easy to do so because it tends to happen slowly.
Run the numbers: Determine how much more you are actually netting first. The bottom-line impact of a raise is frequently not as large as it first appears after taxes.
Don’t take any long-term action: Yes, celebrate, but do so with something limited, like a trip, a special item of jewelry, or a cutting-edge flat screen. Do not immediately enter into any significant obligations, such as leasing a new apartment or purchasing a car. Wait until your new budget has been determined and the initial flush of euphoria has subsided (see above).
Get out from under: If you want to be good to yourself (as you should), how about using the extra funds to pay off some credit card balances or loans? Maybe it’s not as much immediate fun as the aforesaid flat screen, but there’s a lot to be said for clean slates. And with the money you save on interest, you’ll be able to afford to buy a toy that much sooner.
Invest: Continuing the delayed-gratification theme, consider bumping up your 401(k) or IRA contributions—or starting them. You’ll be thankful when you reach those retirement years. Or even sooner: If your raise bumped you into a higher tax bracket, you’ll appreciate the deduction on next year’s tax return.
What does “keeping up with the Joneses” mean?
There are a few ways to avoid falling into the lifestyle-creep trap after your income increases, but it’s not always easy to do so because it tends to happen slowly.
Run the numbers: Determine how much more you are actually netting first. The bottom-line impact of a raise is frequently not as large as it first appears after taxes.
Don’t take any long-term action: Yes, celebrate, but do so with something limited, like a trip, a special item of jewelry, or a cutting-edge flat screen. Do not immediately enter into any significant obligations, such as leasing a new apartment or purchasing a car. Wait until your new budget has been determined and the initial flush of euphoria has subsided (see above).
However, the Joneses have been mentioned before in the context of social comparisons and ostentatious consumption. Some claim that the phrase was first used in relation to two great-aunts of author Edith Wharton who constructed grand residences in upstate and New York City that, in Wharton’s opinion, were outrageously unattractive.
The phrase is said to have been coined by another incredibly wealthy Jones family from the late 1800s, this one hailing from Wilmington, North Carolina (with residences in New York City and Newport, Rhode Island).
The Bottom Line
Although an increase in income is usually pleasant, you might be in debt and broke whether you make $200,000 or $20,000. How you spend and conserve your money will determine everything. As your income increases, you may prevent lifestyle inflation from controlling you by putting some of that good fortune to work through savings and investments, as well as by keeping in mind the distinctions between requirements and wants. Additionally, you’ll have extra money saved up to donate to a good cause or assist a relative or friend who is in need.
Compete Risk Free with $100,000 in Virtual Cash
Utilize our FREE Stock Simulator to put your trading abilities to the test. Trade your way to the top while competing against hundreds of other Investopedia traders! Before risking your personal money, place trades in a virtual environment. Practice your trading techniques so that you will have the necessary experience when it comes time to enter the real market.