Don’t Succumb to Lifestyle Inflation

You’ve heard of inflation, it’s the general rise in prices of goods and services over a period of time (according to Wikipedia).  Because of inflation, you get less bang for your dollar.  It’s like how on Austin Powers, Dr. Evil asked for a MIIIIILLLLLLIOOOON dollars for compensation, but a million dollars is nothing nowadays.  Good thing our salaries go up too, in accordance.

Or is it?

I can’t argue that having a larger salary is a bad thing (because of course, it is a good good thing).  However, if you get a raise, or if you start earning the big bucks (over $100K a year for example), you have to be careful that lifestyle inflation doesn’t catch up to you.

Lifestyle Inflation (according to moi) is when your lifestyle (your house, your car, your trips, your eating out expenses) catches up and maybe exceeds your salary in order to “keep up with the jones’ ” or to show the world that you are indeed a wealthy individual because of your job and your higher pay.

You may think that some doctors or lawyers must be well-to-do, and they very well may be, but at the same time, they might not be.  I was driving to work one day, and saw a lawyer in a fancy car with the license plate “LTG8TR”.  He probably was well to do, but he probably also had high expenses to pay.  He probably had a lot of debt, too.  Mortgage debt, car loans, you name it (if you think I’m being ridiculous by assuming he had a lot of debt, I often think of this when I see people driving fancy cars to make myself feel better- coping mechanism, you can call it).

If your paycheque upgrades, you should try your very best not to upgrade your expenses too.

I have been getting a small raise every year, but I still budget for it as if it were last year.  So the extra $100 every paycheque doesn’t really exist in my budgeting-eyes.  It’s best to pretend that you’re “now making X amount of money per year”.  Again, it comes down to what your values are- what you really want to spend your money on and what is superfluous.

As we move into our highest paying salary years (our 30′s and 40′s and 50′s), we do get instant lifestyle inflation, be it a home purchase, a baby (they are $$$!), saving for children’s post-secondary education and so on.  I think it’s important to get good spending habits now (our 20′s) to carry us forth into later years, when spending loads of money because you have money is easier to do.

Have you resisted the temptation of lifestyle inflation?  What have you done for yourself to ensure that you don’t spend more…now that you’re making more?

About

Young is a writer and former owner of Young and Thrifty and the main "twitter' behind Young and Thrifty's twitter account. She lives in Vancouver, BC and enjoys long walks on the beach, spending time with her anxious dog, and finding good deals. If you like what you read, consider signing up for email updates.

23 Responses to Don’t Succumb to Lifestyle Inflation

  1. I keep to the same budget no matter how much more money I make. My wife on the other hand just finished law school last year and has the “I’m a Lawyer, I can afford anything” mentality. To many people get caught trying to keep up with the Joneses when the Joneses themselves are broke.
    I posted about this a while ago and the video at the beginning sums it up beautifully.

    http://thelooniebinblog.blogspot.com/2010/06/keep-up-with-joneses-or-else.html

    • @Addicted2dividends- cool, you’re another Canadian PF blogger. LOVE IT! =) Yeah, I agree. Keeping up with the Joneses kind of sucks. Almost makes you want to not have any friends (almost). Thanks- I’ll check out your post! Though your wife might have that excitement because she DID just graduate and was incomeless for four years. I guess you just have to remember to nag at her once her honeymoon phase is over. =)

  2. Now that my kids are getting older, we are spending more and more on them for sports, golf, recreation and lately movies.

    For me personally, the company coffee isn’t good enough, now I have to have a McDonald’s or Starbuck’s latte to get me through the morning.

    I’ll have to redouble my efforts and keep my eye on the prize!

    Nicely written article!!!

    • @Money Reasons- Thanks for visiting! Glad to know my writing is getting better =) You are so right, kids can be so expensive (especially in their formative years, you want them to be well rounded so they are enrolled in sports, language classes, swimming, summer camps etc.).

      At least McDonald’s coffees aren’t that pricey =) Did you read my “Latte Factor” post? lol =)

  3. What works for me is seeing older people who are stuggling to make ends meet. Their key earning years have passed, and they are living restricted lives. In some cases, it can be unfortunate and sad, actually (not to be a downer!). Anyway, that inspires me to avoid lifestyle inflation.

    Plus, financial freedom – while a far off concept for me – is a very enticing goal to work toward!

    • @Squirrelers- Yes, me too.. I haven’t even sunk myself into debt yet (no mortgage yet) but am already scheming to find ways to pay it off ASAP. Seeing people past 50 to make ends meet is quite worrisome- especially if they can’t retire when they are 65 and need to keep working (unless they want to of course).

  4. You always write well!

    I think you just struck a cord with me on this topic because I’m experiencing “Lifestyle Inflation” currently…

    On the latte expense, McDonald is still way more expensive than the free coffee I could drink at work (yuck)…

  5. This is one of my pet topics. I absolutely despise the ‘keeping up with the Joneses’ mentality that many people have when their salaries increase. While it might be a good time to trade in your clunker that breaks down every month for a more reliable car (even a new one), it doesn’t have to be a BMW or a Mercedes-Benz. I’m a fan of having a lot of breathing room when it comes to my finances. Once in a while, I’ll splurge, but I’d rather save money for a rainy day than go for immediate gratification.

    • @Raniy-Day Saver- Totally agree! You won’t believe the number of fancy schmancy cars I see driving by here all the time. I think there has been a substantial increase in the past five years (either that, or I am jut noticing it right now). That’s why you’re called Rainy-Day Saver- all makes sense now! =) Good for you- it takes a lot of self control, I think, to be able to resist immediate gratification.

      I don’t see the allure in buying fancy cars, really. I think it adds character when people have big clunkers =) Besides, if you park in a bad part of town, you’ll always have to worry about people scratching or denting your car. Why put up with the extra worry?

  6. I have resisted to lifestyle inflation. Every raise I receive boosts my 403b. Although recently, I am considering allocating some of those funds to charity; like meals on wheels.

    • @Money Funk- Good for you! Do you get a tax deduction in the US for charitable donations too? Meals On Wheels is such a wonderful program- we have it here too and it helps brighten home bound seniors’ days!

      PS love your new avatar/ gravatar! it’s hawt.

  7. I think you might appreciate this given you are looking for a place. My lifestyle inflation capped out at the age of about 28 years old when I finally bought a house in San Francisco. Part of it was b/c I had to rebuild my cash savings, and the other reason is because I truly am satisfied with what I have now.

    I felt that once I was able to get the house, that’s pretty close to realistically what I want and need, there’s nothing else to spend money on. My car is a beater, clothing is just a once a year or two year trip for work, and I just play a lot of tennis. I don’t longer for a better house with a view, or an expensive car or anything. I’m just happy with what I have, I think for at least the next 5 years, if not 10 years.

    Afterwards, there might be a step function where I’ll seek something else, but I’m not sure.

    Best,

    Sam

    • @Financial Samurai- “Finally” at 28? (my eyes are bulging in anxiety because 28 is nearing for me). I do appreciate what you shared, thanks! I think our values are along the same lines- except I like traveling too. I think that should be my main lifestyle adjustment too, that and the possibility of having children. Glad to hear you’re happy! =)

  8. I’m with Addicted. We try and keep our expenses the same no matter how much our incomes increase. This year, our salaries increased a little bit (we were lucky) but that doesn’t mean we spend more on other things, toys, gadgets, electronics, travel, other.

    We’re putting the same into our RSPs as last year, but we’ve increased our mortgage payments with the “new” money. Some “new” money is also finding its way into dividend-payers :) (like BCE, I got it when it was almost $2 lower/share than today).

    No doubt the more people make, the more they tend to spend. That doesn’t have to be the case!!

    I could have bought a new car some years ago. I still drive a 10 year old Mazda. It’s been nice to have no car payments for 6 years :)

    • @Financial Cents- Ooh I have BCE too! Except I have it $1 lower/share than today =) You’re right, some people like to trade up cars every 5 years… I don’t really understand that mentality (unless they use the lease payments or interest payments for tax deductions), because my car is 10 years old and it’s working fine too! I hope to use it for another 10 years. Tradin’ up your salary doesn’t necessarily mean trade up your lifestyle.

  9. A little lifestyle inflation is fine, but I agree that it’s gotta inflate less than your pay raise! Some people look at a pay raise and say “oh, we can go on vacation now!” or “oh, I guess we can buy a bigger house now!”. If you get caught in that spiral you’re trapped.

  10. I think we have to make a distinction between regular raises and higher income due to career changes for example. A raise should not lead to lifestyle inflation since it most likely only helps you keep up with inflation. But I don’t see why a more permanent and substantially higher income should not lead to lifestyle inflation. Why should you not enjoy the fruits of your higher income by driving a nicer car, living in a bigger house, and traveling to interesting places? Money is here to be spent – within reason, of course. I think that in the end spending within one’s means is key irrespective of income.

    • @Invest It Wisely- exactly- you hit the nail on the head! It probably toys with the idea of instant gratification, too.

      @Money Obedience- Good point- thanks for pointing that out. Permanent and substantial higher income can lead to a little lifestyle inflation, but as Addicted2dividends points out, susbstantial income is coming but there might be student loans to pay off, and lost income for years of education to build up, too right? I think if a person has had substantial income for a long time and a good savings, no debt etc. then a lifestyle inflation can be justified. The key is, as you point out, to spend within one’s means.

  11. I think that many people fall into the pattern of lifestyle inflation because it’s what their friends and family are doing. Sort of a lemming scenario, everyone falls off the cliff together. There’s a specific sociological term for it, something to do with the masses (it’s slipped my mind.) I’ve tried to stay frugal, but my other half (my husband) doesn’t see eye to eye with me on everything. So, over time we have had some small lifestyle increases, such as higher rent, a car payment (though it’s only for one car – the other vehicle is my bike!), and more business expenses. My hope is that we are set for a while and won’t see too much more inflation in the near future.

    • @Little House- Hence keeping up with the Joneses =) Hmm I don’t know the sociological term either. Sounds like you two have compromised… I’m sure if it were up to a lot of guys (my boyfriend included) they would get a nice car if they could (e.g. BMW), good luck to both of us in suppressing the lifestyle inflation. =)

  12. Ha! I think I am the poster child for avoiding lifestyle inflation! When I first entered the workforce it was with a “screw the establishment” mentality which landed me a $5/hr part time job at a non-profit music school. Let’s just say that my lifestyle gave new meaning to the word “frugal”.

    Soon I was running said music school, and as it grew, so did my salary. It was still far below what others were making, but I could really see that I was starting to spend way more money than I needed to. That’s when I read the book “Your Money or Your Life” and it really put me on the right path.

    I basically capped my spending at under $20k annually which allowed me to put a huge amount of money into savings. It’s given me an amazing degree of freedom and a whole different way to look at the world!

    Many of my friends thought I was crazy… they were always buying things and taking expensive vacations. But now, they’re all still slogging away and my time is my own. Who’s laughing now?

    • @Rebecca The Greeniac- that’s amazing!! Your story sounds amazing, you should write a book about your experiences. Capping off at $20K a year is hard to do.. I’m sure it was hard but sounds like you’ve developed great habits to help you onto your 30′s 40′s and beyond!

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