Lifestyle Inflation

Have you ever heard of the term? It’s not the traditional definition of inflation as it relates to macro economics. If you’ve read any long established personal finance blog, it’s very likely that they’ve talked about it at least once, particularly to warn against it. If they didn’t, you probably need to start reading a new blog.

Before I go into the explanation, we’ll do some simple math.

What’s 500,000-500,00? Zero right? Ok, so what about a million – a million? Still zero. If you grasp this, you can grasp the concept of lifestyle inflation. Most importantly, it will help you understand why it’s bad.

The idea is that for every increase in pay or income, your expenses go up. Any “inflation” in your income translates into an inflation in your life style. Did you get a nice performance bonus? Here comes the Louis Vuitton luggage. Did you get a promotion that came with a 10% salary increase? You trade your Corolla for a new 5 series BMW. What you’ll find in those circumstances are people with well-paying jobs who still struggle to remain above water. They still have worries, they still have debts. Their net worths don’t go up with their salaries. While on the surface they’re are enjoying the fruits of their labor, in reality, there is no long term benefit to their ever expanding paycheck. A blogger talks about her personal experience with this issue in the a post about additional sources of income.

Does that mean lifestyle inflation is always bad? It’s bad most of the time but not always. If your income goes up by $400/month after taxes and you take that opportunity to pay off your credit card debt, it’s a temporary inflation that will benefit you in the long run. If you increase the contribution to your employer-sponsored 401(k), you may not have access to the money right now, but it’s being put away for your future. If you decide to take that money and build an emergency fund, you’re building a cushion for rainy days. But we all know that’s not what people do with extra money. They celebrate raised by buying out the bar for their friends, buying expensive gifts for their significant others or rewarding themselves with something fancy.

Do you feel like if you work hard for a raise you should reward yourself with an expensive purchase? I guess it depend on what your definition of “reward” is. As far as I’m concerned, your biggest reward is ensuring your financial security, both in the short term and long term. The rest is vanity.

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8 Comments

    1. Thanks for reading. I think we all know someone who is like that. That’s how we have so much consumer debt as a nation!

      By the way I see that you’re from Boston… hey neighbor! (I’m new to your blog so correct me if I’m wrong)

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  1. Lifestyle inflation is something I am keen to avoid once I graduate university. I am surrounded by friends who talk excitedly about all the stuff they will buy once they get their first real paycheck. But me, no way. When I begin my career, my first financial goal is to open a Vanguard account.

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    1. Instant gratification is never a good thing. You have the right idea. The best course of action is to plan for your future. I would also recommend that you take advantage of any employer-sponsored plan. My 2nd employer out of college matched any contribution I made 100% as long as I contributed 6% of my salary and up. So by contributing 6%, I was getting 12%. Currently my husband’s program is similar. He puts in 10%+ and they match him 50%. By putting in 10% of his salary, he’s saving 15%.

      I would invest in that first. Otherwise, you’re leaving free money on the table.

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      1. I’ve already done that with superannuation. Since I am a low income earner (being a student), the government offered me a 50% match for additional contributions up to $1000. Such an easy opportunity to build wealth.

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      2. That’s great. If you start early, you can start small and increase your investments gradually as your income goes up later. There are some plans that allow you to start with as little as $10. I started with $50/month pre-tax at one point, and 3 years later, I got a couple of promotions which allowed me to bring it up to $250/month.

        Better to start small than not at all. I’m glad to hear you’re on the right path. I hope to see you out here again. Thanks for the comments!

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