Lifestyle Inflation, The Silent Dream Killer

Remember when I told you that 78% of full-time workers in America are living paycheck to paycheck?

You may be surprised to learn that this issue affects not only low-income households, but households at all income levels, including those bringing in six figures.

A lot of the struggling six-figure households are likely falling prey to lifestyle inflation.

What is lifestyle inflation?

Lifestyle inflation is the increased spending that tends to occur as people earn more money. It’s the reason people who make six figures end up trapped in the rat race, working more and more hours to fund the lifestyle they’ve become accustomed to.

Is lifestyle inflation really that bad?

Short answer: yes, if not kept in check. Some people make excellent money but are never able to get ahead with their finances because of it.

Longer, more nuanced answer: it depends. Life sometimes necessitates increased spending.

A growing family may upgrade the house and/or car because they need more space. You may need new clothes if, for example, you get a new corporate job but your entire wardrobe consists of sweats and t-shirts.

Increased spending in these situations is reasonably necessary. The issue comes when people confuse wants with needs (“We’ve got kids now, so we need to trade our Honda sedan for that BMW SUV!”) or spend just to keep up with what someone else has or is doing.

Lifestyle inflation in our lives

We’ve definitely engaged in some lifestyle inflation since graduating, such as upgrading the apartment we lived in or taking our dog to doggie daycare twice a week.

Overall, though, we’ve done pretty well with incremental increases in our salaries so far.

We keep our income artificially low. First, we get a healthy tax refund every year. Second, every time we get a raise, we automatically earmark the extra amount for debt payments.

We calculate the difference between our take-home pay after the raise and our take-home pay when we started this journey. Our extra loan payment each month includes this difference.

This way, we continue to live on the same amount as when we started our debt payoff journey and can attack our debt with each pay increase.

Mr. TMG will be graduating from his residency program in June (only 4 months to go, but who’s counting?). Once he graduates, his salary will nearly quadruple.

As we get closer to June, we’ve been talking about our financial plan once that extra money starts coming in.

We know that our tithe will increase. We also plan to have another kid and expect our expenses to increase slightly if that happens.

Otherwise, we plan to keep our spending the same.

I doubt we’ll struggle with feeling like we have to keep up with other doctors at his new job because we haven’t felt the need to keep up with other lawyers in the years I’ve been at my firm.

We will likely treat ourselves a bit, but we have to make sure it doesn’t become a habit. The goal is to use the increase to pay off our debt.

I’ll keep you guys posted.

Tips to fight lifestyle inflation

If you’ve already fallen prey to lifestyle inflation, take heart! It’s not too late to turn things around. Here are 5 tips to help you.

1. Create a budget

Be honest with yourself about your necessary expenses vs. things you just want. This will help you identify areas that you can cut back to give yourself some margin.

2. Use your budget

Review your budget before you buy a new item to be sure you can afford it. Does it fit into one of your budget categories? Will it cause you not to be able to buy something you actually need?

3. Impose a waiting period for new purchases

If you’re considering buying something, wait five days and see if you still want it. Sometimes we spend in the moment just because an item looks nice or we see someone else with it. Waiting helps to ensure we’re not spending on things we don’t even want.

4. Bank raises and windfalls

You’re already accustomed to living on your pay before the raise. Automatically earmarking the increases for your financial goals will help keep lifestyle inflation at bay.

5. Get a tax refund

Decreasing the exemptions you claim on your W-4 will increase the amount of taxes withheld from each paycheck.

This lowers your take-home pay during the year, but you’ll get a lump sum come tax season that you can use to fund your financial goals.

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Lifestyle inflation can really hinder your financial success and can creep up on you before you know it. Taking these simple steps will help keep it at bay so that you can use your money to advance your goals.

Have you fallen prey to lifestyle inflation? Do you have any other tips to avoid it?