Lifestyle Inflation Illustrated

Do you know what lifestyle inflation is? Remember when you got a raise and decided that you could now afford a lease on a new car, instead of driving around your old junker? That is lifestyle inflation. Remember when you finally paid off that car loan and suddenly had extra money in your pocket each month, which you promptly spent going out more often with friends? That is lifestyle inflation.

lifestyle inflation illustrated-01

Lifestyle inflation is the easiest trap to fall into. It is also an extremely dangerous trap. If you fall prey to lifestyle inflation, you’ll never get ahead. You think you’ll be able to save more to reach your goals with each raise or debt payoff, but in reality your lifestyle just grows to fit into your new available income. You likely don’t even feel happier with your life and all your new stuff because you hardly realize that your spending has increased and that your lifestyle has inflated. Spending more becomes the new, subconscious normal.

How I fell prey to the lifestyle inflation beast

You might think that someone like me, who clearly spends a lot of time thinking about money, would be immune to lifestyle inflation. Well, unfortunately for both of us, you’d be wrong. I’ve always suspected that my expenses are going up over time, however I’ve generally been able to reach my savings goals so I haven’t dug into the numbers too much. Recently, I decided that it was time to see how bad the lifestyle inflation has gotten. Let me warn you, it isn’t pretty.

When I first graduated from college, I lived with my parents for a while. As soon as I moved into an apartment, I quickly became aware of how far my meagre salary needed to stretch. So I lived frugally, and I was fine with that. I watched where my money went very carefully, making sure to stay within my budget categories each and every month. At the time, I was saving for a down payment. I am certain that having a concrete, immediate savings goal in mind helped me stick to my budget.

Fast forward a few years and I bought that condo I was saving for. As soon as that happened, I no longer had a huge, imminent savings goal. My savings goals became further off – a new car in a few years, a house somewhere down the line, college for my hypothetical future children, retirement. I still saved (although clearly not as much as I could have), but I also let my lifestyle grow just a little bit at a time. I started eating out more often, buying more expensive items at the grocery store, buying more clothes, and travelling. Sometimes I would recognize that I was spending more than I really wanted to be, and I would rein it in for a while. At some point I would always revert back, though, and the inflation continued.

What do the numbers tell me?

Numbers don’t lie, so here they are in all their glory. I have reliable data for FY 2012 – 2015 (aka July 2011 – June 2015). The graph below shows how the four budget categories I tracked during these years changed over time.

lifestyle inflation

As you can see, it’s not a pretty picture (although it is on a rather perfect, even upward trajectory). My overall budget has increased by 86% over a four year period. That’s more than 20% per year, on average. Ouch.

The good, the bad, the ugly

Digging in further, it is apparent that some of these categories aren’t in bad shape. The “home” category (which included rent when I paid rent and now includes my mortgage, condo fees, etc., net of rent from BF) actually decreased when I purchased my condo. It is now gradually increasing due to a variety of factors, including a recent refinancing which slightly increased my monthly payment and inflation which is causing taxes, insurance, etc. to rise a little each year. But I’m not too worried about this. The same goes for utilities, which have somehow actually decreased over time.

Two areas are cause for concern. The “food/drink” category has increased 84% over four years. The bar graph doesn’t look too bad because this change isn’t a huge dollar change, but on a percentage basis it is definitely concerning.

Similarly, the “other” category is a big problem. It has increased by 64% over four years. This isn’t surprising, as this is where all the slush goes. Clothes, travel, personal care, essentially any expense that doesn’t cleanly fall under another budget category goes into “other.” And, as I explained in my post about how I budget, this is the way I like it. Having flexibility in the “other” category to spend my money how I wish amongst all of my many wants is freeing. But I think I’ve given myself a bit too much freedom.

Next steps

This exercise has given me a lot of information with which to move forward. I plan to dig into the spending that took place within the “other” category to see where my money is really going. I suspect clothing and travel are problem areas, but I’ll have to review the numbers to find out for sure.

I have also realized from this exercise that there is clearly a lot of fluff in my spending. Somehow, four years ago, I was living a perfectly happy life while spending almost half as much money. In order to reach my 46% net worth increase goal this year, I’m going to have to make some cuts to my spending. Let’s hope that the lifestyle inflation beast can be tamed!

Have you noticed lifestyle inflation? Where do you notice it most – food, clothing, travel, etc.?


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34 thoughts on “Lifestyle Inflation Illustrated

  1. I love the term lifestyle inflation! I did not know that was the term!

    This explains my crazy, ironic, paradoxical hypothesis of bad money management: Many people’s financial troubles came whent they started making money.

    Of $1 EARNED, it often times turns into $1.30 SPENT and $0.70 RECEIVED (taxes)

    • You’re completely right – so many people start having trouble with money as soon as they get some! Great point!

  2. It’s good you’re taking a cold, hard look at your numbers. Our belief is that travel is one of the most worthwhile expenditures there is, because you get irreplaceable memories from it, and it helps you grow enormously as a person. So don’t cut that out of your “other” budget if at all possible. Find ways to travel more cheaply if you need to, but keep traveling! 🙂

    • Great advice, thanks! I completely agree with you and while I’d like to cut the budget down a bit, I have no plans to give up travel.

  3. This is great that you have broken down your spending completely, and how it’s changed over time. That’s always the most challenging part! I’m a very visual person, so the graph really resonatesz On the opposite side of the spectrum, instead of cutting expenses (for example in your “other” category), have you brainstormed ways to increase your earning potential? It always seems there are more ways to do so, instead of cutting your budget to bare bones. Just a thought! 🙂

    • Good suggestion! Increasing earning is definitely an option, and something I would consider. My point with this post though is really that my spending has grown a lot, and I’m not necessarily deriving more value from it. I need to get back to spending money where my priorities are. If I can earn more money at the same time, great!

  4. My husband and I have largely eliminated the little things that don’t add to our life, but we still suffer from lifestyle inflation- in the form of a home renovation. We saved up first, but I didn’t think we would actually hit our budget. We’re not done yet, but we are scaling down our bathroom vision to fit our budget.

    One thing to figure out is if you are spending a lot to replace things that are old and worn out. Clothes, shoes, etc. tend to go in cycles, so you may not be suffering so much from lifestyle inflation as needing better quality inflation.

    • I can totally see how home renovations could get way off track in terms of budget. Once you get started, you just want to do it right but each little change really adds up!

      I do think there is a bit of better quality inflation happening. I’ll have to see if I can tease that out of my numbers.

  5. Lifestyle inflation is so easy to do, but it’s not always negative. I can also be a sign of moving on to a new stage in your life.

    When I first graduated college, I lived in a small apartment with nothing but junker furniture, in a small town. At some point I got a serious girlfriend and we bought a house. My expenses are certainly higher now, but I don’t have any regrets. I’m sure when we have kids it will bump at least a bit again.

    I think the key is to not let lifestyle inflation creep in to silly places, like the cost of your car, or upgrading your house repeatedly.

    • Very true that sometimes lifestyle inflation is worth it. Ironically my fixed housing expenses went down a bit when I bought my condo, but things like housing and children could be a good reason to have your spending go up. My lifestyle inflation has unfortunately crept into some silly places, like buying more clothes. I don’t need more clothes!

  6. I’ve been pretty good at not letting lifestyle inflation get the best of me. I think the best decisions I’ve made were to max out my 401K and I also set a goal each month in how much I have to invest in my taxable accounts. Basically after these two things are done, I’m actually not left with very much money to spend on going out, clothes, etc.

  7. It’s always a good idea to take a closer look at your spending history and see what you can improve on. Lifestyle inflation is easy to get into and it’s good that you’re trying to reduce lifestyle inflation.

  8. After moving into my new house last week, I am definitely experiencing this. Over the weekend, I went out and spent $25 on a toilet paper holder because it matched the other bathroom. While I could have gotten by on a $15 one, I wanted to make it look nice.

    During the weekend as well, money was flowing freely for all of the usual expenses of a first time homebuyer: cleaning supplies, yard supplies, and random furniture. This carried over to my roommates: one of my roommates spent $200 on a rug! I couldn’t believe that..

    Have a good day,
    Erik

    • Moving can be so expensive! Sounds like you didn’t do too badly though. The real problem is if you decide that a new house needs all new furniture!

  9. I fell prey to lifestyle inflation as my income grew and it’s sad for me to think how much I could have saved if I didn’t. At least you picked up on the trend early enough and can make the change before you get too far thrown off your course.

    • Yes, I’m glad I found this when I did, of course I still have lots of spending that I wish I hadn’t done!

  10. Lifestyle inflation is a dangerous thing. I realized my wife and I were on the same page with spending when she mentioned someone at work getting a raise and spending it all. She said “If you get a raise, you should be coming out ahead, not back where you started.”

    I think we’ve only experienced lifestyle inflation in travel expenses. But it’s something we love and we can use our frequent flyer miles as leverage to get much more travel out of a given pot of money, so there is a rationale behind it. This year I’m thinking all of our expenses will be down, except for travel and home-related expenses. I’m starting to think that we’ll spend more on travel this year than on food!

    • Wow – good for you for escaping lifestyle inflation! I think I already spend more on travel than food, but that really just speaks to how much I spend on travel haha

  11. As much as I want to say I haven’t succumbed to lifestyle inflation that’d be a lie! My budget has definitely gone up over the past few years. We recently bought a house that has double the mortgage payment of the last house. It’s still not a huge payment since the first house had a tiny mortgage – but still, it’s definitely lifestyle inflation!

    • At least you’re getting something substantial out of your increased budget. Housing is probably a more worthwhile expense than clothing!

  12. Ever since buying a home we have had to increase the amount we spend on things like home improvement, tools, upgrades, etc. Even my “frugal DIY” retaining wall will run me about $3.5k :0 Besides that we’ve also seen a bit of lifestyle inflation int he form of our vehicles. After college we both had older cars and thankfully were able to drive them for quite some time (225k miles for my car!). We bought newer used cars recently and that is definitely a form of lifestyle inflation.

    • I’ve been thinking of getting a new car recently and I’m so glad that I did this analysis before I took the plunge! Also, great point about home improvements. Just because you do something yourself doesn’t make it cheap!

  13. I for sure went through that most of my adult life until several years into freelancing. I never thought twice about what I bought because I always seemed to have money leftover, but I never gave my money a purposeful job. Now I’m in serious lifestyle deflation, if you look at it that way, but in other ways the quality of my life and intentional living has greatly increased! So that’s a good thing!

    • That is great that it sounds like you’re increasing your quality of life while decreasing your budget. That is exactly what I would like to do!

  14. I wouldn’t be worried about the food category at all. Practically everyone I know eats a much healthier diet now than when they were in school. I know that I sure do!
    Some lifestyle inflation is hard to avoid, there are expenses we face as we get older, that we just didn’t have before. Your first year out of school you probably avoided buying things like new running shoes, or having to do much of a wardrobe upgrade for work.
    That said, it is so much easier to spend a little more money here and there and have it add up, than it is to keep it in your pocket!

  15. Since getting out of debt, we’ve definitely relaxed in a few areas. That, and thanks to health problems, I finally gave up on cooking. (I have tried many times, and it’s just not tenable.) Convenience food is probably the biggest money suck of non-housing expenses.

    Now that we have an imminent savings goal again, I’m getting better at tightening up the budget. I switched to a cheaper phone company, I’m buying more frozen convenience food so that it’s mainly my husband who’s eating out, etc.

    • Having an imminent savings goal definitely helps. I find that especially with small purchases like eating out, reminding myself of a big goal helps stop me from buying unnecessary items.

  16. We definitely experienced some lifestyle inflation over the past few years, but I have to think it was countered by some lifestyle deflation, too, because our spending definitely did not exceed our income net of saving/taxes/giving, which only increased with inflation. I’d have to dive into the numbers as you did to get the real answer!

    My husband doubled his income with the job he started this week and we moved, so this is a perfect time for lifestyle inflation to attack us. We definitely have increased expenses because of the change of local cost of living. I’m trying to be very aware of this and use my blog to keep us accountable. I’m not opposed to a little lifestyle increase (if it’s deliberate and valued) but I definitely don’t want to see mindless inflation!

    • I completely agree that lifestyle inflation is OK if it is deliberate and aligns with your values. Sometimes it might be inevitable, as in your case with moving to a higher COL area. It sounds like your very aware of the potential risk, so I’m sure you’ll be able to keep it in check!

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