Chris Mamula and his wife grew their household income from about $50,000 to nearly $180,000 between 2000 and 2012. Despite this increase, they didn’t move to a larger home, upgrade their vehicles, or go on regular shopping sprees.
Instead, they put their extra cash toward their mortgage payment, which they paid off in 7 years, and invested Chris’s entire paycheck. This allowed Chris’s wife, Kim, to cut back to part-time work in 2012 after their daughter was born. It also gave Chris the freedom to retire from his career as a physical therapist at the age of 41.
While it was tempting for the Mamulas to succumb to lifestyle inflation when their income almost quadrupled, they knew doing so would keep them from achieving their most important goal: becoming financially independent at a young age.
How Lifestyle Inflation Works
Lifestyle inflation occurs when your spending increases as your income grows. It usually happens gradually over a period of time, making it difficult to notice.
You get a promotion or a raise, so you decide to buy a new car. The payment eats up most of the difference between your old paycheck and your new one. Or maybe you take a new job with a better salary and think, “Now I can finally move into my own place.”
Every level comes with new expenses and things to buy. You kick the savings can further down the road and tell yourself you’ll start to save and invest later when you have more money. But later comes with new financial demands, and the cycle continues.
Lifestyle inflation can make it difficult for you to get ahead financially and meet your long-term goals.
“People who are subject to lifestyle inflation are never able to save a substantial amount of money,” said Taylor Venanzi, Certified Financial Planner™ and Owner of Activate Wealth, LLC. “They may appear successful on the surface (given their career growth), but they are often unhappy or frustrated internally.”
If you save your pay increases instead of spending them, you can give yourself and your family options that you may not have otherwise.
Tony LeClaire, Certified Financial Planner™ and Principal at Caliber Wealth Advisory, has worked with many clients with high-paying careers who were diligent about investing their money, rather than spending it when they earned more.
“They woke up one day with a robust portfolio, nice home, and the choice to live a life they wanted to when it came time to retire,” he said.
5 Ways to Avoid Lifestyle Inflation
As you grow in your career and earn more money over the years, there are several strategies you can implement to keep your spending in check and lifestyle inflation to a minimum.
1. Direct raises to savings and retirement
Any time you get a raise, put all or most of it into your savings or retirement accounts. This strategy is effective because you won’t ever “see” the money in your checking account, so you won’t miss spending it. It’s a behavioral trick that can keep you from getting accustomed to a larger lifestyle.
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“If saving for retirement is your top priority, and you just landed a 5% raise, then immediately bump up your 401(k) contributions by that exact percentage,” said Jeff Rose, Certified Financial Planner™. “If credit card debt is haunting you, then direct the raise into your emergency fund and knock out that debt at an accelerated pace.”
2. Follow a plan
Take the time to think about what’s important to you and where you want to be financially 5, 10, and 20 years from now. This can help you resist lifestyle inflation and allocate your extra funds towards your goals.
Avery Breyer, author of multiple personal finance books, said her annual income doubled early in her marriage. But she and her husband saved most of that money and were able to pay off their house in fewer than 5 years. Breyer revealed that this was no easy feat, especially when her high-earning friends were going on exotic vacations each year.
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Once you’ve figured out how much you need to achieve your goals, lifestyle inflation can suddenly become unappealing because you know it would sabotage your chances of success. One key element of financial planning is your budget.
A budget shows how much money you have coming in, what you’re spending it on, and how you can make changes to save more. Kyle Kroeger, personal finance blogger at Financial Wolves, earned a raise and promotion, which resulted in a 20% increase over the last year.
“Even though we make more money than we have in the past, my wife and I stay disciplined on a spending plan,” he said. “We keep eating out and luxuries to no more than $750 per month.”
3. Avoid the comparison trap
While it’s easier said than done, focus on yourself and disregard what your peers are doing.
Venanzi said there’s no way of knowing all of the things that got your peers into a given situation. Are they spending all of their money on nice things without saving a dime? Do they come from wealth? Do they love their work?
“Don’t worry about what others are doing and focus on yourself and your own progress,” he said.
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Some level of lifestyle inflation is okay. In fact, it can be motivating. But the key is balancing your goals with luxuries like a new laptop or trip to Europe. However, trying to keep up with friends or neighbors can sabotage your financial future.
Venanzi encourages his clients to buy a house that’s below their budget, go for the car that’s a little cheaper, and try to avoid high-end department stores. These things compound over time and can keep you from meeting your goals.
If you share finances with your partner, try to live off of one salary and save the other. The Mamulas lived off of Kim’s salary and used Chris’s income to save, pay off their mortgage quickly, and invest. This allowed the couple to buy way less house than they could “afford” and drive cheaper used cars.
4. Evaluate your life before the income increases
Once you earn more money, you may be tempted to inflate your lifestyle because you can. However, according to the hedonic treadmill theory, you won’t necessarily experience long-term happiness.
This theory posits that we, as humans, operate at a baseline happiness level. When good or bad things happen, we experience a spike or drop, but we always return to our baseline.
Prior to starting their own firm, Natalie Slagle, Certified Financial Planner™ and Founding Partner of Fyooz Financial Planning, said she and her husband took jobs that nearly doubled their income. As a result, they doubled their restaurant and clothing expenses.
Finally, she and her husband sat down and asked themselves questions like: Is it necessary to spend $400 a month on clothes? Or $800 a month on going out to eat?
They reflected on what their relationship and lives were like right out of college and realized they were happy when they didn’t have a lot. They already had a wonderful life, so there was no need to double their spending in categories that didn’t bring them much value or joy.
From that point forward, Natalie and her husband were able to reduce their expenses and put those dollars toward their dream of owning a business together.
5. Build your financial support system
Just because it’s your personal financial journey doesn’t mean you have to go it alone. It’s helpful to have a team of people to support and encourage you to reach your goals.
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This can be a friend or spouse who’s working alongside you. You can meet regularly to check-in and update one another on your progress.
A financial coach or Certified Financial Planner™ can also make an invaluable addition to your financial team. Both can guide you through the process of defining your goals and creating a strategy to accomplish them.
Venanzi compares this to going to the gym. Some people need a trainer or classes to stick to their plan. Don’t think of this as a weakness if it helps you achieve your goals.
Good Times Aren’t Guaranteed to Last
It can be exciting to get a raise or promotion or land a higher-paying job. When you do, it’s all too easy to go to Nordstrom instead of T.J. Maxx, splurge on five-star restaurants six nights a week, and buy the most expensive house and cars you can afford. Doing all these things at once can interfere with your long-term financial goals.
Lifestyle inflation can also lead to hardship if your financial situation changes and you no longer make as much money. The money you earn today may not be the money you earn tomorrow.
Take advantage of today’s good times by saving as much as you can, treating yourself in moderation, and focusing on your long-term strategy.