Lifestyle Inflation Definition and How to Cope with It

Has the quality of your life changed since graduation? Have you started making more purchases once you’ve been promoted?

Did you know that such changes in life have a special name? We are talking about lifestyle inflation.

What does it mean? Why does it happen? Are there any negative impacts it may have on your financial stability?

Read on to learn more about this notion and the best ways to manage your lifestyle inflation.

What Is a Lifestyle Inflation?

lifestyle inflation definition

Once the income starts to increase, people tend to begin spending more. When you get the desired promotion or a long-awaited pay rise, you also begin buying more items and generally spending more on pricey purchases such as a new house, a car, or various gadgets.

This notion is called lifestyle inflation. And it is considered to be one of the top challenges related to personal finances.

As we can see from the lifestyle inflation definition, consumers allow themselves to spend more money once they receive a promotion or a pay rise. It may sound good on one side as they have worked really hard to move forward and receive this appreciation. So, they want to see their progress by proudly letting themselves purchase something they couldn’t afford before.

However, it doesn’t always refer to happiness.

Spending more won’t make you more satisfied with life in general.

Here is why lifestyle inflation happens and what you can do to avoid it.

Causes of Lifestyle Inflation

Why does lifestyle inflation happen?

It usually appears during the transition period when you’ve graduated from college or university and found your first full-time job.

If you could share a bedroom with two or even three students and eat frozen pizza or ramen on a daily basis at college, this time you feel the need to improve the style of your life.

Those things that you’ve considered as luxuries are now thought to become necessities.

Once you have a steady position and a stable salary you feel the need to upgrade to your own small apartment in the city. Those things that were satisfying for you a few years ago now seem to be less attractive. This is when you begin to spend more on improving various aspects of your life.

The 2018 report by the Bureau of Labor Statistics showed that housing, transportation, and food are the three major expenditures for the modern consumer.

US consumer expenses stats

These are the costs people tend to spend their money on. But while your employment improves and the income grows, it may be tempting to start spending even more as you finally have more means to afford certain things.

Read Also: LTV Meaning: What Loan-to-Value Ratio Is & How To Calculate

Examples of Lifestyle Inflation

Whenever people have additional means to support themselves they start spending more and more on things they may not really afford or even need. You may also find yourself in a similar situation.

Here are some examples. 

There is Peter who was used to sharing a room with three other students eating sandwiches and frozen pizza while at college. It was his usual lifestyle and it seemed normal.

Once Peter graduated and landed a full-time job he found that sharing a single bedroom with friends or colleagues isn’t that comfortable. So he rented out a small apartment just for himself. When he started climbing a career ladder and finally got his first promotion, he decided to move into a bigger apartment closer to his work. After that, he made his first big purchase and bought a car because he wanted to upgrade his lifestyle and change it for the better.

Such upgrades and spending can continue more and more as time goes by and the income grows. 

Many people also want to keep up with the Joneses and strive for a better quality of life similar to their coworkers or other people. As a result, they want to purchase a more expensive car or a bigger house just because other people have it.

This is a common pressure of our society where people spend more than they can actually afford on things they don’t actually need.

Real Disposable Personal Income and Real Consumer Spending

How to Avoid Lifestyle Inflation

Here are the best strategies for avoiding spending spree and improving the quality of your lifestyle:

  • Know Your Real Budget

While a long-awaited 5% pay rise may seem like a fortune you shouldn’t make quick decisions about where to spend it. Take some time to evaluate and calculate the real changes to your monthly budget.

How much will be left after all the necessary expenditures and taxes? It is really a sufficient amount to take a new car or go on a vacation?

Define how much you will receive and think whether you can really afford spending spree.

  • Set Priorities

One of the best ways on how to combat lifestyle inflation is to set your priorities. Think about things that are really important as of today and things that can be omitted. People tend to spend more than they can actually afford to finance. As a result, they find themselves deep in debt or can’t save enough for retirement.

Do you really need to purchase that brand new Lexus? Or is your current car perfectly fine to drive you to work and back?

Also, you might want to buy new clothes so that you look fabulous at work. But investing this money into some education course or even going on your dream vacation can bring you more benefits in the long run.

  • Avoid Debt

Another significant strategy on how to manage lifestyle inflation is to avoid debt.

Don’t take out installment loans for things you can’t really afford at the moment. Just because you’ve been promoted recently you can’t afford a new house, an expensive gadget or a new fashionable wardrobe straight away. If you count all the costs and fees that will come together with the debt, you will see that the total sum with interest will be much higher and not that reasonable at all.

  • Don’t Be Jealous

How to prevent lifestyle inflation when all the people around you seem to live a better life? Are you willing to keep up with the Joneses?

Don’t be jealous of other people and the way they live. Remember that spending lots of cash on expensive items doesn’t mean those people are really rich. They may be deep in debt living from paycheck to paycheck while trying to impress the others.

  • Save the Excess

What if you set the monthly budget and planned all the necessary expenditures and still have enough money left? Why don’t you save the excess?

Instead of wasting your cash on unnecessary items and things you can live without, go ahead and create a savings account to allocate this sum for your future retirement. Otherwise, you will be able to use this money later for your vacation. In any case, it will be a pleasant surprise to have a good amount set aside for a major expense once you need it.

  • Have Certain Financial Goals

You may be tempted to spend more as you start earning more. But having certain financial goals in life can be much more beneficial to your overall financial health and stability.

Do you want to pay off all the debt, purchase a new car or a house, save for your children’s education?

Focus on such important targets and understand how staying away for unwanted costs can help you achieve them faster.

When Is Lifestyle Inflation OK?

Of course, there are various situations when spending a little more can actually be good for you. For instance, if you are going to have a baby it pays to think about moving to a bigger house or apartment with a separate room for the child.

Also, if you’ve been recently promoted you may now need to buy new clothes to look appropriately among coworkers.

As your life improves and certain changes in your finances occur it’s completely normal to delegate some duties. If you are working more hours and have a pay rise you may want to hire someone to clean the apartment or mow your lawn while you enjoy the time with your loved ones.

That being said, it’s significant to find a balance and think twice before you make any financial decisions as each of them can impact your future.

Sources Used in Research for the Article:

  1. What actions are people taking because of the rising cost of living, Office for National Statistics,
  2. How Much is Inflation Costing You, JEC | Republicans,
  3. Five Tips for Protecting Your Money during High Inflation,UNFCU,