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The myth
As people start making more money, their spending power increases and in turn, they tend to spend more on needs and wants. This is called lifestyle inflation because changes in the standard of living result in higher costs.
Factors like peer pressure or the “fear of missing out” (FOMO) can also contribute to a desire to upgrade your lifestyle. Luxuries like dining out, going on vacation, or spending on non-essential services become a staple.
Because of this, lifestyle inflation is seen as a hurdle to financial stability and good money management. Some people believe it’s better to maintain a simple lifestyle so they can save or invest any extra earnings instead.
The reality
Improving your quality of life may seem like the right move once you start earning more. However, if you’re not careful, lifestyle inflation can lead to overspending.
You might find yourself not saving much or still living paycheck to paycheck even if you start making more money. This may lead to financial stress and delay long-term goals like investing for retirement and reaching financial freedom.
Unexpected events can also drain your savings or emergency fund. To get back on your feet, you might need to let go of luxuries for a while. Readjusting to a smaller budget can be a challenge especially if your spending habits have changed a lot.
Though it’s always smart to live within your means, that doesn’t mean you need to be extremely frugal. Spending on worthwhile things like better housing and healthcare can improve your overall well-being.
This can directly or indirectly influence the way you perform at work and reach for personal goals. An improved lifestyle can motivate you to work even harder and stay on track with your targets.
If you know where your money goes and you’re spending it thoughtfully, lifestyle inflation might not be a problem.
Verdict: Mostly true.
If you want to save and invest as much of your money as you can, then it’s ideal to maintain a low-cost lifestyle.
However, lifestyle inflation isn’t necessarily bad if you can afford it. Raising your budget for needs and wants might be OK if you’re still meeting your savings and investing targets.
That’s why following an effective budgeting strategy is a must. The more you earn, the more you can spend, but make sure you’ve already set aside money for saving, investing, and other obligations.
It may help to automate your savings, bills and debt payments, or investments.
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