Tame the Lifestyle Inflation Beast Now… or It Will Devour Every Extra Cent

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As an entry-level newspaper reporter on a $28,000 salary, I drove an ugly Gumby-green Toyota Corolla with nearly 200,000 miles and just one hubcap. I ate a lot of macaroni and cheese. A couch wasn’t in my budget, so I plopped my brother’s old futon mattress on my living room floor.

I seldom had more than a few bucks left over from my paychecks, so I had no savings, but at least I wasn’t accruing more debt. If I budgeted properly, I’d even have enough for a couple rounds of drinks with friends.

But several years and salary bumps later, my savings remained paltry — and I was still driving the green machine. So where was my extra cash going?

Well, there was the extra $30 a month to have a washer and dryer in my apartment. And the furniture that I gradually put in said apartment. And the takeout food that I substituted for mac and cheese. And the gym membership upgrade. And the drinks with friends that evolved into dinner and drinks.

None of these upgrades sounded like a big deal. But combined, they added up to major lifestyle inflation, and they ate away my potential savings.

What Is Lifestyle Inflation, and When Is It Bad?

Lifestyle inflation, also known as lifestyle creep, happens when your spending increases as your income rises. It does not include those unavoidable increases in your cost of living, like a rent hike or a rise in grocery and gas prices.

Lifestyle inflation is a choice. It happens when you upgrade to a fancier car or apartment because you have more money to spend. Or you start dining out more or buying slightly pricier clothing.

The tricky thing about lifestyle inflation is that it isn’t inherently bad. Lifestyle inflation is the reason I’m not shopping at Forever 21 at age 38. It’s the reason I have a real couch now. It’s the reason I was able to take on a car payment and send my old Corolla to scrap-metal heaven.

The danger of lifestyle creep comes when you don’t have long-term goals. Without a plan, you’re more likely to spend extra money mindlessly. You’ll stay broke even as the numbers on your W-2 soar.

7 Ways to Avoid Lifestyle Inflation

The good news is, by establishing priorities and good habits now, you can fight excess lifestyle inflation later.

1. Learn to Live Within Your Means While You’re Still Broke

If you’re in college or working in a low-paying job, just being able to pay your bills without taking on more debt is a win. Focus on spending no more than you bring in, so your future earnings won’t be eaten up by debt payments.

You might be surprised by how much a little strategery can help you save money on groceries. Making small changes at home can add up to huge savings on utility bills.

2. Create a Budget ASAP

Accounting for every dollar you spend now will help you make smart decisions about how to allocate extra money in the future. Are you a budgeting novice? It’s OK — this simple guide on how to budget will get you started.

3. Spend More Money (but Only in Your Head)

How would you spend an extra $5,000? Maybe you’d pay down student loans, save more for retirement or sock it away to use toward a down payment on a home.

Imagining how you’d spend cash you don’t actually have may sound like a futile exercise in daydreaming — but identifying what you want now will help you decide what long-term goals to focus on. And having goals will help you avoid mindless spending when you actually have more cash in hand.

4. Got a Raise? Congrats, but Figure Out What You’ll Actually See

OK, suppose that $5,000 raise becomes reality. Nice! But hold on before you pop open the bubbly. Do you know how much of that money you’ll actually see?

First, calculate how much extra you’ll pay in taxes. Pro tip: Figure out how much you’ll owe now if you don’t want to pay at tax time, and adjust your withholdings accordingly.

Next, account for inflation — the kind you can’t avoid. As of June, the 12-month inflation rate was 5.39% in the U.S. That means if you were earning $50,000 a year as of June 2020, on average you’d now have to earn $52,695 annually just to maintain your lifestyle.

Also, if you contribute a certain percentage of your salary to your 401(k), you’ll need to account for that.

Once you’ve determined how much extra money you’ll take home, you’ll have a realistic picture of how much extra you can spend.

5. Pretend That Raise Never Happened for Now

Sure, you could spend that extra money on a pricier apartment. And if that’s your long-term goal and you can afford it, go for it. But maybe your ultimate goal is to buy a house. That’s when you might want to keep up the frugal habits you developed when you were broke, so you can save the extra money for a down payment.

Avoiding lifestyle creep is especially important if you’ve got credit card debt or student loans. Putting extra money toward what you owe will have a huge payoff, because you’ll save on interest payments.

Stashing extra income in a retirement account now, instead of spending it, is also a great way to build wealth. For example, if you’re 20 years old and put $5,000 in a Roth IRA now, it could be worth $180,000 by the time you’re 65, even if you never contribute another cent.

6. Ignore What You See on Instagram

Scroll through Instagram and it seems like everyone else just bought a five-bedroom house and spends their weekends sunbathing on a yacht in Martinique. But sometimes, avoiding lifestyle inflation is as simple as focusing on your own goals and ignoring everyone else. You know your goals, your budget and your values. You never know whether there’s a financial mess behind the fabulous lives you see.

7. … but Treat Yourself (Within Reason)

Fighting lifestyle inflation doesn’t mean you never get to treat yourself. You’ve put in hard work to score those raises or earn extra income. So if you can afford it, go ahead and take a vacation or splurge on a piece of clothing occasionally. Celebrating the wins can keep you focused as you strive toward your goals.

When Is Lifestyle Inflation OK?

Like I’ve said, lifestyle inflation isn’t a bad thing when you have a long-term plan. Here are a few examples of when it makes sense to let your lifestyle inflate.

Your needs change: You don’t want to automatically start blowing extra money on rent just because you can afford to do so. But when your needs change — say, you’re preparing to start a family and need more space, or you have a new job that you want to live closer to — it’s reasonable to consider spending more.

You’re spending on a long-term goal: Remember when I told you to imagine how you’d spend money you don’t have? If you’ve finally saved enough money to make that happen, you have permission to stop daydreaming.

You’re investing in yourself: When spending extra can help your professional development, or it’ll make you happier and healthier in the long term, it’s worth considering. If you’re starting your first real job after college, it probably makes sense to invest in a real adult wardrobe. Taking on a car payment might make sense if driving an old, not-so-faithful car is a constant source of stress.

We’ll even give you a pass to order takeout or have your groceries delivered if that little bit of lifestyle inflation means you have extra time to invest in your side hustle.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected].