Lifestyle Inflation: Can it be Reversed?
I am always trying to learn. Usually, I read at least one Personal Finance article a day—most days, multiple articles. One suggestion I see often, that I absolutely love is: avoid lifestyle inflation.
Oh snap! This is genius, relatively simple to do, and makes a huge difference. It’s also really challenging to reverse engineer if lifestyle inflation has already creeped in.
What is Lifestyle Inflation?
Simply put, lifestyle inflation (or lifestyle creep) is: increasing my spending because my income has increased. As we move through our careers, hopefully our income will increase. With years of experience and new skills mastered, we are in a position to receive raises and/or look for employment opportunities that pay better than entry-level positions.
Generally (not always), we will make more money as time goes on. Simultaneously, life goes on. Things are added to our plates, where there wasn’t room before. Travel, kids, work wardrobes, socializing outside the workplace—all these things arguably add value to our lives. And we pay for them.
Whenever I read about someone who lived as a broke college kid, graduated, entered the workforce, continued to live as a broke college kid for a few years, and saved the difference—well I just think this is magnificent.
However, I can’t envision how this could’ve been my path, unless I was a completely different person at 22. I just wasn’t in that headspace then. There is no sense in wishing I did something differently, especially when I just wasn’t capable in the past to act differently. But I think avoiding lifestyle inflation is awesome.
As a result of my lifestyle inflation, my spending certainly did increase as my income increased. So how do I reverse engineer this?
Why Avoid Lifestyle Inflation?
You Can’t Miss What You Never Had
One reason rests in the idea that you won’t even know what you’re missing. If I lived as a broke college kid for a few years, graduated, entered the workforce, and avoided lifestyle inflation, I would ideally continue to spend roughly the same as I did as a college kid.
I might keep a roommate for a while to be sure I am not eating the entire cost of my housing. Perhaps, I continue to grocery shop frugally rather than eat out 5x/week. Essentially I would operate under the mindset that if I couldn’t afford it when I was a college student, I can’t afford it now.
I wouldn’t know how glorious it is to live without a roommate. Or how nice it is to attend happy hours a few times a week. Or what it would be like to go shopping and buy just about anything I want, just because I can.
If I don’t know what I’m missing, I can’t miss it. I can’t sacrifice something I’ve never had.
An example: My husband and I recently went on a cruise. We went on Carnival Cruise Line, which apparently is “the working-person’s cruise line” (eye-roll). Well, this turned out just fine, as we are both working people. But we could’ve probably swung a swankier cruise line.
This was his first cruise, and my second (my first having been with Carnival back in college), and we didn’t know the difference. Having never been on a swankier cruise line, we were just fine with the type of cruise we went on and had a great time. However, if, in the past, we had been on a swankier cruise line, or had adopted the mentality that we deserve “only the best”, we may have been dissatisfied.
It Buys You Time
Another reason avoiding lifestyle inflation is encouraged: I’d have more time. This is phrased deceptively, as we can’t truly get more time. Time is finite. However, since I’d be making more money, I could save/invest the difference, and get a fantastic jump-start on my finances at a young age. Since time is a lovely friend to have within personal finance, the earlier we start saving and/or investing, the better.
You may have seen the graphs showing investments made in a person’s 20s versus investments made in their 30s. Here’s a link to an article showing said graphs from Darwin’s Finance. I will use their numbers:
If I invested $5,000 a year, every year, from ages 25-35, and then never invested again, I would invest a total of $55,000. By age 60 (assuming an 8% average growth) I would have $615,580. In contrast, if didn’t begin investing until age 35, but invested $5,000 every year from age 35-60, I would invest a total of $130,000. By age 60 (assuming the same 8%), I would have $431,754.
If you didn’t catch it: you’d have more money at 60 investing for only 11 years starting at age 25, than you’d have at 60 investing for 25 years, starting at the age of 35. Mind-blowing.
The earlier we start investing, the better. Also, if we are investing some money, and saving some money, we are less likely to get into debt. When it’s time to buy a car, we potentially save the money, buy it outright (or have a hefty down payment), and avoid paying interest on this debt.
Ultimately, if we do not spend more as our income increases, we have more surplus monies to put toward investments and savings. This allows for some tremendous outcomes.
What if I Already Allowed Life Inflation?
When I was 22 years old and making $40,000 thing were tight. Mostly because, I didn’t know how to budget, and I really struggled to manage my finances. This struggle went on until age 27.
At age 27, I was making approximately $60,000 and things were still tight. This was when I began the process of cleaning up my credit, paying off debts, and budgeting with a fervor. Once I felt confident in those arenas, I began to have some freed up cash, as I wasn’t paying off so many debts and playing damage control. With this freed up cash, I explored my saving, investment, and retirement options, and have honed a strategy that I feel works for me.
During this time, my career has blossomed. My income has tripled in the last ten years. Despite all of the favorable evidence for reduction of lifestyle inflation above, I still don’t live on what I made when I entered the workforce.
So how have I shifted from spending every dime I make?
- Any raises since age 27 until now (age 32), I have infused into retirement accounts and taxable investment accounts.
- I have an allowance. Recently, I spent all of my bi-weekly allowance in one weekend. There were several events that weekend that were important to me (I valued) and I chose to spend my money this way. As a result, I didn’t have any spending money for the next couple of weeks. In the past, I would’ve just shifted some money over and gave my allowance an infusion. This time, I did not do that. It didn’t feel like deprivation because I was able to spend my allowance as I wanted. I also knew I would get my allowance again in two weeks. The power and choice rested with me, and I made an educated decision.
- I began to track my spending. With this, I have been able to see how much I spent on things I don’t value (clothes, eating out), and shift it toward things I do value (saving for large wants, travel, etc.)
- Beginning to budget has changed how I look at my money. I am able to decide where my money will go ahead of time, which reduces emotional and impulsive spending. With a budget, I am able to assess what I value ahead of time, and set a plan to spend in alignment with my values.
- I budgeted my savings. Once I was able to have a solid budget in place, tracked my spending, and see my surplus, I was able to set a line item in my budget for savings. I pay my savings account, just like a bill, every month. Same for my taxable investment account.
- I established an Emergency Fund, and defined what an emergency was. In the past, a close friend or family member needing a loan gift might’ve constituted an emergency. I was always susceptible to someone else’s emergency becoming my emergency. Now, I have clearer parameters on what I am willing to consider a true emergency.
- I learned how to say ‘No’. This includes saying “no” to certain social events (that I may have not wanted to go to anyway), to requests for loans, to solicitations for certain charitable giving, and to things that felt like obligations (but cost money), that I did not find value in.
Can Lifestyle Inflation be Reversed?
Sure! I am sure, with a certain level of dedication and determination, and allowing for some cost of living adjustments, I could live like a broke college kid again. Or at least on something close to my entry-level income.
Frankly, I don’t want to. I like my life. It’s quite comfortable. My husband and I are privileged enough to be high-income earners. We are still able to save a significant amount, while living comfortably. Our frugality is optional, and we are willing to be frugal in some areas, and are unwilling in other areas.
However, we have still implemented the above strategies to curb any further lifestyle inflation, and to dictate where our money goes. Lifestyle inflation is sometimes called ‘lifestyle creep’ because it just creeps in. Sneakily.
The most notable change for me now is, I am now in the driver’s seat of my finances.