What Is Lifestyle Inflation And How To Avoid It

Let’s be honest, almost all of us work because we need to pay for life. We don’t work for the flat out fun of it, although we may take lower paying jobs to be happy. But at the end of the day wages pay for food, a roof over your head etc. Any pay rise you get at work can be a huge deal. Even the difference of a few hundred pounds can mean a lot. But when you start earning more we may instinctively think of how we’ll spend the extra money.

It might be a higher budget for travel, or moving to a nicer house now you can afford now. There are loads of ways you can improve your lifestyle with extra money. But that’s where lifestyle inflation comes in.

What is lifestyle inflation?

Simply put lifestyle inflation is when you inflate your lifestyle each time you get a pay rise. With each pay rise you may change things in your life. For example if you go from earning £20,000 to £25,000 you might start eating lunch out instead of making your own. Or you might start buying fancier groceries rather than own brand. That is lifestyle inflation.

Then if you go from earning £25,000 to £30,000 you might move to a nicer part of town and start paying a bit more rent. Then when you increase to earning £35,000 you sell your old car and buy a new one because you can afford the monthly instalments.

Over a period of time your general lifestyle costs creep up and by the time you’re earning a lot more your day-to-day spending is also a lot more. That’s why someone earning over £100,000 may have less disposable money, or less savings than someone earning £30,000. The person earning more is spending a lot more on their lifestyle, where as the person earning less is spending a lot less.

Is some element okay?

When you start earning more and progressing in your career it’s normal that you’ll want to upgrade your life in some ways. And have something to show for working harder and progressing.  Lifestyle inflation is bound to happen at some point but it shouldn’t happen at the same rate as your pay rises.

But lifestyle inflation can lead to financial troubles if you keep increasing your lifestyle costs and taking on more debt for property, cars etc and don’t have protection in case your income falls again.

How to avoid lifestyle inflation

There are some ways you can protect yourself from the harmful side of lifestyle inflation by not instantly accounting for your additional pay in spending. For example if you get a pay rise of £5,000 then maybe increase your budget for food, a car, going out by £1,000 and save the rest of the £4,000. You won’t miss it because you never had it before. But if your pay was to decrease again not only would you only be spending £1,000 more than you did before you’d have some savings to keep you going.

Set your budget by percentages

If you go with monetary values rather than percentages lifestyle inflation is more likely to kick in. For example you may save £500 a month when your take home is £2,000. And then continue to save this even when you take home £3,000 a month. But if you set your savings at 25% you’ll start to save £750 a month when your income goes up. By doing this you will get some extra money to spend but you’ll also be saving/ investing more depending on how you split your income up.

Have emergency savings

It’s so important to have emergency savings set aside for just that emergencies. Whether you earn £17,000 a year or £170,000 a year you should have a pot of money set aside just in case. It’s recommended to have 3-6 months worth of wages, or 3-6 months worth of fixed expenses. This means if you were to lose your job you’d have enough to cover you for a few months. It also acts as a barrier incase of unexpected expenses.

A good way to start saving is to put a certain percentage of your wages aside each month. This could be 5% or 20%, but this means if you get a pay rise the percentage stays the same but your contributions will increase.

Look into investments

Once you’ve built up a good emergency fund look into investments and ways you can save towards your future. This could be through your pension, a stocks and shares ISA or something else. But make sure this is a priority. Investments shouldn’t come before an emergency fund because the later will be easier to access. But do remember with investments only put in what you can afford to lose. Or choose a lower risk investment.

Take on debt sparingly to avoid lifestyle inflation

A mistake you can make when your income increases is to take out more debt. A higher mortgage, a loan, an expensive car repayment. You’d do this in faith as you have the monthly income to pay for the instalments. But this can be an issue because if your income drops you may struggle to meet the repayments. If you do need/ want to take on more debt think about saving to put down a bigger downpayment. Not only will your monthly payments be less but you’ll pay less interest. It’s important to ensure your fixed expenses are affordable regardless of your situation.

Don’t compare yourself to others

A final way to avoid lifestyle inflation is to not compare yourself to others. You may feel under pressure to spend more if you’re hanging around with other high earners. Or you may make assumptions about people with lavish lifestyles. You don’t know peoples story and they’ll only share what they want you to know. If someone appears to not have to worry about money they might be in masses of debt. Or have come into some money through inheritance. Only worry about your own situation and don’t compare your perception of others with yourself. It’s a dangerous game. You don’t want to overstretch your finances just to impress others.

Have you experienced lifestyle inflation before?

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