Inflation is a hot button topic in our society right now. Exorbitant food, housing, utility, and fuel costs? Blame it on inflation. Crisis level supply chain issues across the entire globe? We’ll take inflation for 200. An unstable, erratic stock portfolio?
You guessed it…inflation.
While economic inflation puts a major strain on our daily lives, there isn’t much we can do about this in a practical sense. It’s a result of geopolitical forces outside our control. But there’s no need to just resign ourselves to an insecure financial future. We can shield our accounts and investments from another type of inflation on the block.
This phenomenon is called lifestyle inflation—and excellent news: It’s preventable! Here’s all you need to know about lifestyle inflation and how to avoid falling into this common (but unnecessary) trap with smart, intentional money management.
What Does Lifestyle Inflation Mean?
Lifestyle inflation is when your spending habits escalate as your income grows. In other words, the more you make, the more indulgences you start to purchase.
A brand-new luxury vehicle? Of course.
Dinner at a chic five-star restaurant? No brainer.
Monthly entertainment subscriptions? Absolutely.
Top-shelf organic skincare? You deserve it.
A European vacation? Just booked the flights.
Gone are the days of brewing coffee at home in those sweatpants you’ve owned since high school. Now you drink $8 turmeric lattes while sporting Lululemon activewear. And listen: There’s no problem with treating yourself sometimes. But it becomes an issue if the amount of extra cash you spend each month outpaces what you earmark for savings.
How Can You Tell It’s a Problem?
You know the endless cycle of living from one paycheck to the next, no matter how much income you earn or the number of raises and promotions you score?
That’s the problem with lifestyle inflation. This pattern makes it hard to invest in major financial goals and milestones, such as launching a small business, becoming a homeowner, or increasing your retirement fund. Lifestyle inflation can also land you in a serious pile of debt, at which point, even basic living expenses start to feel unaffordable.
Check out these alarming statistics:
- The average American household has a balance of $96,371 in debt (Bankrate).
- The average American who uses a credit card has a $5,221 balance (Bankrate).
- Only 45 percent of Americans have more than $1,000 in savings (NASDAQ).
- 55 percent of Americans have less than $1,000 or no savings at all (NASDAQ).
- Almost 60 percent of Americans live from one paycheck to the next (Charles Schwab).
- 44 percent of Americans have a difficult time paying off their bills (Charles Schwab).
- Less than 40 percent of Americans have built an emergency fund (Charles Schwab).
- Only 28 percent of Americans have a clear written financial plan (Charles Schwab).
- The average American spends $483 monthly on nonessential items (Charles Schwab).
- The main concern for both Millennial and Gen Z Americans is cost of living (Deloitte).
- 59 percent of Millennial and Gen Z Americans do not feel financially secure (Deloitte).
- 57 percent of Millennial and Gen Z Americans have retirement worries (Deloitte).
How Do You Avoid Lifestyle Inflation?
Of course, we shouldn’t overlook socioeconomic inequities, which can often prevent those in marginalized communities from building sustainable wealth. These barriers of entry must be called out in conversations around the financial climate of this country.
However, if the zeroes in your savings account do not reflect the income you’re earning, now is the time to re-evaluate. It’s never too late to break a pattern of lifestyle inflation, create a money management plan, and invest in your future goals. Here are a few ways to overcome lifestyle inflation and regain control of your finances.
- Establish a monthly budget to allocate your entire income, track expenses, and monitor spending. Then, hold yourself accountable to stick with it.
- Open an emergency and retirement fund, then contribute to both these accounts each month before making any nonessential purchases.
- Avoid accumulating major credit card balances. If you have a credit card, only swipe it on rare occasions, then pay it off as soon as possible.
- Do not allow someone else’s spending to influence yours. Whether a friend posts about their travels on social media, or a co-worker just bought a shiny new Lexus, there’s no reason to shift your own financial values or habits in response.
- Think about your long-term investments, instead of focusing on the material items or experiences you want right now. Ask yourself: “If I book this wellness retreat in Aruba, am I willing to sacrifice the down payment on a house later on?”
Bottom Line: You Can Fight Back
From the college student who earns a minimum wage paycheck, to the business executive who nets a six-figure salary, no one is immune to the risk of lifestyle inflation. It’s a sneaky pitfall, so don’t become its latest victim. With these mindful strategies, you can cultivate a more secure and sustainable relationship with finances moving forward.