Avoiding the Pitfalls of Lifestyle Inflation

February 26, 2014

We’ve all been there—that space between student poverty and reliable income, that particular area of time in which we’re no longer poor and we want to live like it. Most often, this happens after a period of unemployment, be it the transition from student to career man or woman or upon landing a job after a layoff or break. The sudden shift in income is certainly a relief, but it can also be a bit overwhelming.

It is in this space that young people are most susceptible to overspending, a trend known as lifestyle inflation. One of the many difficulties facing young people in this economy, lifestyle inflation is one of the simplest ways to destroy your chances at building wealth, as well as put your financial future at risk.

Curb the Need to Keep Up With the Jonses

Lifestyle inflation happens for a few reasons. First, people like to celebrate their sudden rise in income by making either big purchases or many purchases. You’re right to reward yourselves, but make sure you keep it within reason.

Lifestyle inflation also occurs because human nature dictates that we should be able to have that which belongs to our neighbor. That is, when our sister, best friend, or neighbor down the street gets a brand new car, we want one too. And now we can afford it. While it may be tempting to make purchases to impress those around us, those impulses are best set aside. Desire will always continue to escalate—a bigger house now will lead to desire for an even bigger house, to an even bigger house. Sound financial planning now will ensure a future full of wealth.

Remember Those Goals

Another strategy you can use to prevent lifestyle inflation is to set goals meant to keep you on track. If you want to retire early or buy a new car outright, write these things down. Having a written goal will help prevent you from spending extra money on little things just because you can. It will also help if you track the amount of money you’re saving. For example, if you want to buy a new sweater by pass it up, place this amount of money in a savings account. This can work for small purchases (coffee) and big ones (cars)—you’ll be surprised by the amount of extra money you have.

Leave Some Room For Celebration (But Not the Kind You'd Think)

Finally, celebrate future raises by ignoring them. You’re likely perfectly able to survive on your current salary, so consider anything above that extra and divert it straight into savings. If you tell yourself that you’re making the same amount of money, you’re more likely to spend within your means and still set aside a nice chunk of change for those future goals.

It’s certainly tempting to spent exactly the amount of money you make—it’s actually how most of us live our lives—but being cognoscente of lifestyle inflation will ensure that you’re able to accomplish everything you set out to do!

Heidi Andrews roots for the LA Dodgers and the freedom to eat chocolate for breakfast. When she isn’t teaching herself to make those cool designs on espresso drinks, you can find her advocating for financial literacy at The Jason Hartman Foundation, a nonprofit dedicated to improving knowledge across the globe.