Lifestyle Inflation: What It Is and How to Avoid It

Lifestyle inflation, or lifestyle creep, is when your spending rises with your income. In other words, your spending and standard of living goes up as your income rises. This is different from spending more due to inflation, when there is a general rise in the cost of goods.

For example, let’s say you made $30,000 a few years ago. Back then, you were packing your lunch to work and would occasionally get a takeout coffee on the way to work. After a few promotions, you make $45,000. Now, you buy your lunch almost daily and buy takeout coffee three times a week.

In this case, your income went up, but so did the amount you spend on eating out during weekdays. The NPR Life Kit podcast has a popular episode on lifestyle creep with other examples.¹

Although extra spending isn’t totally detrimental to your finances, lifestyle inflation can hinder you from achieving your financial goals. For instance, if you want to set aside money so you don’t need to rely on credit cards during the holiday season, lifestyle creep could mean you don’t have enough to do so.

Extra spending here and there is fine if it aligns with your budget, but excessive spending could mean you’re experiencing lifestyle inflation.

Here is how you can start looking at your finances to determine if you’re experiencing lifestyle creep.

Track your finances

You will only be able to understand your spending behavior if you know where your money is going in the first place. Ideally, you’ll want to have a record of your spending over several months, but a few weeks will do.

To get a snapshot of your spending, use your bank records, credit card statement, and other financial records. If you already use a money-tracking or budgeting app, see if you can download spending data from the last few months.

Look at how much you owe in debt

The more debt you have, the harder it could be to pay it down, especially if you’re also spending more due to lifestyle inflation.

When looking at your bank and credit card statements, note how much you are paying toward debt. If the amount has significantly increased, it could be because you are relying on credit cards or other forms of debt to get by and are spending more than you earn.

When you are paying off significant debt, you will likely need more in savings when an emergency happens.

Detect any increases in discretionary spending

If you haven’t already, organize your spending into different categories, like housing, clothing, food, and transportation. Then, look at your spending habits month to month and see if there are any differences.

Sometimes you may see slight increases — like if your mortgage payments went up because of an increase in property taxes. However, if the amount you spend on discretionary items like dining out, excessive clothing, and entertainment has gone way up, it could be a sign you’re experiencing lifestyle inflation.

Look at the types of expenses you’re spending on

Aside from analyzing the amount you spend on discretionary items, look at what you’re specifically buying.

For instance, let’s say you need a new vehicle and just got a job promotion and pay rise. Instead of purchasing a similar model at a similar price tag, you decide to opt for a luxury model.

These changes may tell you whether you’re experiencing lifestyle creep.

Scrutinize your savings and financial goals

Examine whether you made any progress towards your financial goals. Could you stash away at least $1,000 in your emergency fund? Or go on vacation without using a credit card?

If your income has increased and you have no savings or have yet to make progress on your financial goals, these are signs that you’re experiencing lifestyle inflation.

Lifestyle creep can have a negative effect on your financial health.

Here are several ways you can try to avoid lifestyle inflation:

• Monitor your spending: The more you track your spending, the easier it is to see small changes in your finances. If you’re considering changing your spending or adding new expenses, consider whether it’ll be beneficial.
• Set up automatic deposits or payments: Setting up automatic deposits to your savings account is a smart way to help you reach your financial goals. Automating loan or debt payments can also help you prioritize your financial health.
• Carefully calculate your new budget: If you recently got a new promotion or your income has increased, calculate how much more you’ll bring home. Then look at this amount to determine how to spend it by creating a new budget.
• Leave room for splurges: Making a restrictive budget could lead to you rebelling and spending too much. Instead, set aside some money each month to account for splurges or impulse buys so you’re still spending well within your means.

Social factors tend to drive the impulse behind lifestyle inflation.

“Keeping up with the Joneses” refers to comparing yourself to others, possibly leading to feeling you have to spend or purchase items to match what others have.³ Maybe you see your neighbors have hired contractors to install a new in-ground pool. Or your favorite influencers are going on vacation, and you feel a twinge of envy.

You’re the one living your life — what makes someone else happy may not make you happy. To help combat some of these impulses, take some time to understand that the “reality” presented on social media isn’t necessarily real life. Maybe that vacation isn’t going to fill you with joy, and maybe that video was edited in a way to make you want to go there because it’s a paid sponsorship.

Take the time to figure out what truly makes you happy. You may find that buying and owning more things isn’t the key to contentment.

Go ahead and enjoy your money. You’ve earned it, after all! While it’s OK to splurge and make some upgrades to your lifestyle, be cautious so you can live within your means. With some self-reflection and careful budgeting, you can turn lifestyle inflation into something positive.

Make it easier on yourself and use a budgeting app to keep track of your finances — here’s a list of the best budgeting apps to get you started.