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Lifestyle Inflation: What it is and how to avoid it!

Provided by Robert Warther, Warther Private Wealth

Lifestyle inflation is a phenomenon that tends to occur when people get a raise or a better paying job. When people start to get paid more, their expenses tend to rise as well. Which in turn hinders your ability to save and build wealth. An example of lifestyle inflation would be a college grad who gets a good job and decides to upgrade from their $750 a month apartment to one that costs $1300 a month. Even though the first apartment was adequate, the grad chose to move to something a bit nicer that costs more.

Why it happens

Although everyone’s spending habits are different, lifestyle inflation can affect anyone. One of the biggest contributing factors is a “keeping up with the Joneses” mindset. People have a natural tendency to compare themselves to others, which includes what others are buying. If your friends or coworkers drive nice cars, you might be tempted to buy one yourself to fit in. This is just one example, but it can creep into other areas of your life as well. You might feel pressured to spend more on vacation, going out to dinner, clothes, or the need to send your kids to private school rather than public. Just so you don’t fall behind the “Joneses”.

Reasons to spend more

Although lifestyle inflation and the associated spending if often viewed negatively, there are times when you should spend more. You might need to buy new cloths to fit the position that got you your raise or the new job. Another example would be moving to a new home because you have a baby on the way and need more room.

It Happens

Lifestyle inflation is bound to happen at least a little. Overtime your circumstances will change both professionally and personally, which might require you to spend more money on things, such as a new home or wardrobe. As your obligations evolve, some amount of lifestyle inflation is to be expected.

Sometimes the only reason for increased spending is to improve our quality of life, which is fine as long as you can afford it.

How to Avoid it

While some lifestyle inflation is expected, it is important to remember that every spending decision affects you tomorrow, and even a few smaller expenses will add up over time. Even if you get a pay increase, it is very easy to end up living paycheck to paycheck still. You might make more, but could end up spending it all to maintain a new (inflated) standard of living.

Spend or Save?

Every time you are considering a purchase, consider hard if you can actually afford to purchase it. Should you be spending that money? Or should you save or invest it for your retirement? Ensure that you are on track for retirement by developing a plan and an estimate for how much money you will need in retirement. If a 25 year old was to invest $800, a 5% annual return would leave them with $5,632 by the time they were age 65!

Needs or Wants?

This point is self-explanatory but is not always an easy rule to follow! When you are thinking about a purchase, consider if it is a need or a want. This is a great way to avoid lifestyle inflation. Even if you need to purchase something, ask yourself HOW bad you need it and remember that there might be cheaper alternatives. Never rush into a purchase, and if you think you need something, consider thinking about it for a few days first.

Make a Budget and Track your Spending

When you know where your paycheck is going each month it is much easier to reduce your spending. You should keep track of all you incoming and outgoing expenses so that you can make a weekly or monthly budget. You should determine how much money you have to spend on “needs”, how much you should save or invest, and how much you have as disposable income per month. A good method to avoid lifestyle inflation is to save or invest a healthy amount of your raise or increased earnings. This will keep your money working for you and out of reach!

Do it Yourself!

We all know that our time is incredibly valuable, and even though we can make more money, we can’t go back in time. A lot of time we end up outsourcing tasks such as mowing the lawn, cleaning the house or simple handyman jobs. While paying someone else to do these tasks can often be nice, they can cost more than you think. If you are looking to reduce spending, doing these tasks yourself is a great way to do it. It may require some schedule rearranging but can save a lot of money in the long run. If you are unsure about how to do something, consider looking it up on YouTube before paying someone. You will be surprised what you can accomplish! Tasks like cleaning or painting the house can also be a good way to spend time with your family, while teaching and learning valuable skills.

Save for Large Purchases

Large purchases tend to throw a wrench in peoples finances. Often this will lead people to borrow money and take on another monthly expense WITH INTEREST. Rather than taking out a loan for these purchases, consider saving up and paying cash. While it may take you longer to afford it, it will keep your monthly expenses low and you won’t have to pay any interest. Sometimes these large expenses are unexpected however, such as damage from a natural disaster or a car accident. For these cases, I recommend creating a sort of emergency fund, that you only spend from when you really need to. Having emergency funds available can provide you a sense of security from unseen expenses.

Lifestyle Inflation is a part of life!

While this article has painted lifestyle inflation in a bad light, it is not necessarily a bad thing. It becomes a problem when you spend more than you make and save! Once you have the important expenses taken care of, it is ok to start spending more. Often times lifestyle inflation is caused in part by other people in your life. While you might be ok with living on very little, don't forget about what your spouse or family wants as well. As long as you are planning for your future and accounting for your current spending, you should be fine.

Robert Warther may be reached (239) 276-7939, or

Investing involves risks, and investment decisions should be based on your own goals, time horizon, and risk tolerance. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.

Securities offered through Independence Capital Company, Member FINRA/SIPC, a registered broker-dealer. Investment Advisory services offered through Warther Private Wealth, LLC, a Registered Investment Advisor ("RIA"), registered in the State of Ohio. Independence Capital Company, Inc and Warther Private Wealth are not affiliated. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. The information contained herein is based on sources we believe reliable but is not considered all-inclusive. Past performance is no guarantee of future results. Please contact your Financial Advisor with information regarding specific investments. Opinions are our current opinions only and are subject to change without notice. Generally, investments are NOT FDIC INSURED, NOT BANK GUARANTEED, and MAY LOSE VALUE.


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