What it is
Lifestyle inflation happens when a person’s spending increases as income grows. It typically occurs after a promotion or big pay raise.
As an example, let’s say you have a tight food budget and so you cook your own meals. After getting a generous salary increase, you started to eat out more often. This increased what you regularly spend on food.
In this scenario, higher income prompted you to upgrade your standard of living. Something that you used to consider as a luxury has become part of your routine.
What it means for you
If you’d like to save more money or invest more, it’s best to keep lifestyle inflation at bay. Adopting a higher standard of living isn’t necessarily bad, but your spending may snowball if left unchecked.
Lifestyle inflation is also called lifestyle creep because the increased costs can sometimes go unnoticed. When you have more cash but no plan for it, you might start a habit of spending without much thought.
These purchases can add up, leaving you with less money for your financial goals. It could keep you from investing or reaching for financial independence.
One way to prevent or control lifestyle inflation is to set a budget that encourages mindful spending.
Then, consider the effects of actual inflation on your finances since things can get more expensive even if your lifestyle stays the same.
