What Is Lifestyle Inflation and Why Should I Avoid It?

Millennials have more disposable income than their parents. They also have more debt, too. How is that possible? The culprit might be disguised as the markers of success.

Picture this: You just landed your first real job. You’re starting your career on the ground floor, pulling an entry level salary and making ends meet on a shoestring budget. Of course you’re not saving any money—there’s nothing leftover. You’ll start saving for retirement once you get a raise. You know that if you just pay your dues for 6-12 months, you’ll get promoted, and then you can catch up on your savings.

Eventually, you earn that promotion and you get a bump in pay! Finally, you think, as you look around at all the things you can now afford to upgrade in your life; your car, your wardrobe—heck, maybe you’ll get Netflix AND Disney+! Six months after your promotion, your bank account still looks the same as it did before your got that raise.

This is called lifestyle inflation, and no matter how much money you make, you are still susceptible.

What is Lifestyle Inflation?

Lifestyle inflation is the gradual increase of your spending as your income increases, leaving you with the same amount of disposable income (or less) than you had before your raise. The danger of lifestyle inflation, though, is that it happens so gradually and naturally—a fancy dinner here, a shopping spree there—that you might not even feel it. Earning more money can unlock doors for you that let you live a better life; you can afford to carry a mortgage, get a reliable vehicle, or cover childcare costs, and you deserve to enjoy the money you worked hard to earn. But if you inflate your lifestyle faster than your income, you’ll end up living paycheck to paycheck, but surrounded by nice things.

Although millenials have more disposable income than their parents, it seems they are not immune to the same societal pressures of “keeping up with the Joneses—otherwise known as the Fear of Missing Out. ‘FOMO’ can take a real toll; according to creditkarma survey, 50% of young adults in Canada have gone into debt to keep up with their friends, with a third of respondents saying they've racked up more than $500 in FOMO debt. And some young Canadians may be falling into habits that perpetuate a cycle of overspending, as more than a third (35%) of respondents said they don’t feel comfortable telling their friends “no” when friends suggest an activity they can’t afford. The top situations causing FOMO were vacations (45%), weekend trips (42%) and weekend or after-work dinner or drinks (36%).

You earned that raise… now, make your money work harder for you. Here are some of the things you can do to utilize that bump in pay to inflate your future, instead of your lifestyle.

Inflate Your Savings and Investments First

Before you treat yoself, commit to being good to yourself first. If you’re accustomed to living paycheck to paycheck with very little disposable income, you may not have an emergency fund saved. We all have to weather rainy days, and it’s always better to be prepared. Having a nest egg can help you recover faster from an unexpected expense. So resist the urge to splurge for just a little longer and instead, use the extra cashflow to build up an emergency fund or pay off a nagging bill without impacting your current lifestyle.

If you are currently living a very deflated lifestyle and would like to improve your living situation, consider saving just a portion of your new paycheck, even if it’s just $50 per pay period. Use our Savings Calculator to get an idea of what you can afford to save, and to set your savings goal.

Keep your perspective of Social Media ‘Real’

Social media bears greater influence over our purchase decisions, and over how we see ourselves than ever before. Just like lifestyle inflation, social media’s influence on our perceptions of beauty and success are gradual, and almost undetectable. It’s easy to follow influencers and wish that we had their life—almost as easy as it is to use photoshop.

As you browse social media or read the tabloids, remember that you are already enough, and every standard you think you need to live up to is imaginary. There is no timeline by which you should accomplish all your goals in order to be successful. Enjoy a happier self image by keeping your perspective of social media as real as possible. Instead, aspire to be someone who has everything they need, and who retires at 65 (or sooner).

Lifestyle inflation is a healthy part of progressing, as long as your lifestyle doesn’t outgrow your income. If you suddenly have some more breathing room in your finances, hit the pause button on spending and think about how you can make your money work as hard as you did to earn it. It all starts with a plan.

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