Lifestyle inflation is another name for the monster under your bed. 👾
Why? Because you never think it’s there, and everyday it slowly creeps up closer to your pillow while you’re sleeping. And then one day, BAM, it takes over your life, and you don’t know how to get free. ☠
In plain English words, lifestyle inflation is how much it costs for you to live. And as you can guess from the word inflation, these costs do increase, especially when you don’t know what to do with your money and you’re suddenly earning a decent wage. Because the thing is, investing, saving, getting a better job and all the rest is all nice and dandy, but if you succumb to lifestyle inflation then there is no point. Because you’ll never be able to increase your savings rate, because you’ll keep getting into debt and because you won’t be the one in control.
Anyway, to make things a little clearer, let’s put some structure to this post, eh?
What is lifestyle inflation?
Put simply, lifestyle inflation happens when you start spending more because you start earning more. Every time you get a raise, every time you make more, you spend more. This keeps going perpetually making it even more difficult to get out of debt, save money and think of the future. It’s literally the definition of the rat race. It’s a dreaded ‘work and spend’ cycle, which as Kyle says, is really a ‘work-spend-get-paid-more-spend’ cycle.
And as Dave Ramsey says, it is:
More money, same problems
Which sucks, right? If you make more, you want to be using that money intelligently and making it work for you, right?
Sadly this is what happens to most young people and students when they get their first job:
Mary Anne is 21, doesn’t make much and lives pretty cheaply. But one day she gets a job and starts making some real money. She’s proud of herself and so decides it’s time to upgrade to a nicer flat, with a higher rent. A few months later, she gets a raise, and decides to use the money to buy a new car with a car loan. Next thing you know, Mary Anne is earning £50k a year but spending £50k too (or more!) on her car, on over expensive trips, on getting the latest iPhone, on getting designer clothes. Dammit, she thinks. She’s trapped. 🤷♀️
Mary Anne has fallen into lifestyle inflation. And to make it more depressing, she reaches the age of 65 and realises she hasn’t saved a penny and will have to depend on her children to take care of her. As I said before, it sucks.
Lifestyle inflation explains why people earning over £200,000/year will still say they’re ‘broke’, will still be in ‘debt’ and will have never ending expenses. Lifestyle inflation is why Mike Tyson went bankrupt after earning over $400 million throughout his boxing career. Lifestyle inflation is why governments will always increase taxes, and not lower them.
How can this cause problems?
Let’s really look at the root of the problem. You’ve been working hard at your job, and get a raise of £500/month on your monthly income (which is nothing to be sneezed at). What’s the thing you say to yourself? I’ll tell you. It’s…
I deserve it
You’ve worked your butt off for the past year and you feel you deserve those extra monthly £500. And you really do! You’ve worked hard! But then those £500 mean you decide it’s time to buy a new car, and very quickly those £500 disappear down the car loan funnel.
‘I’ve worked hard, so I deserve a car’
This is what you’re telling yourself. What’s missing here is the identification of priorities. Why do you want a car? Are you sure you really need a car? Why not buy a second hand car? What is your number one priority for those extra monthly £500?
It’s not until you ask yourself those questions that you realise that you want a car to increase your social status, so other will throw compliments at your new car, and look up to you for working hard. You want to tell the world you’ve worked hard, and you will use this car to display your efforts.
We’ve all been through it, and it’s totally understandable that you care what your peers think of you. But sadly, as many of us know, 1 year later you won’t be appreciating that car and will want an even better car/watch/phone. It’s a never ending cycle, that sadly does not satisfy at all. Those extra £500 a month could have gone to a much better cause that would still satisfy you 1 year later.
What satisfies? Freedom. Options. Flexibility. Use those extra £500/month to buy you more freedom and options. What do I mean by this? An emergency fund. Investments to retire early and reach financial independence. A fund to take a year trip around the world. 3 years of expenses so you can quit your job and find a new one. And once you do know what your priorities are, then you can allocate them to a house that you actually need, to a car that you actually need and to a phone you actually need.
How to combat LI
There are some people who say there is no point in saving money when you’re young because ‘I don’t make much’ and therefore ‘can’t save much’. However:
- There are huge benefits to saving early on: hello compound interest 🙋 and it’s not about how much, it’s about how early.
- There is DOUBLE no point if you finally do a get a job, earn good money and still don’t save. The same people who say they won’t save when they’re young are the same that fall into lifestyle inflation. 💁♀️
So ignore these people, and start saving as early on as possible. And – combat lifestyle inflation. How?
By being aware that lifestyle inflation exists, and increasing your savings rate with your salary increases.
You see, I’m not saying you need to live like a broke student you’re entire life. A bit of lifestyle inflation can be good when it’s controlled and makes sense. We’re not restricting ourselves here, we’re simply being aware of our spending habits. What I’m saying is make sure you increase your savings rate from the famous 15% to something higher, so you know you’re taking advantage of this salary increase in a healthy way.
Mary Anne gets a raise of £500/month, so she’s now making £2,000/month instead of £1,500. She deserves it and she’s very happy. She increases her savings rate from 20% to 35%, meaning she now saves £700 instead of £300. Her expenses have now increased from £1,200 to £1,300 per month. She has allowed herself a bit of lifestyle inflation of £100 to not completely restrict herself, but has also dramatically increased how much she saves and invests every month. Kudos to Mary Anne. She is not falling trap to lifestyle inflation 😎
Obviously every case is differently, but as you can understand, the more your salary increases, the more you can save. As long as you don’t fall trap to lifestyle inflation, you don’t need to spending any more (or a controlled amount more). Adjust the budget, look at your personal situation and see if there is a genuine need to be spending more. Because not falling trap to lifestyle inflation is not only good for your money, it’s also good for the environment, for society (#consumerism) and for your mental health (less is more).
This post is a little bit of a rant, but I’m writing it so that readers are aware of lifestyle inflation. Just by being aware that it exists and that it can become a trap can be pretty life changing. Because once again, at the end of the day, it’s all about your money mentality. Money should not be viewed as a coping mechanism to help you through days you don’t enjoy (the whole ‘I deserve this’ thing), money is not an end in itself, it is a tool to get you to an end. To be more free, to have options, to be flexible.
Thoughts? Anyone agree? Comment below 😛⬇