Lifestyle Inflation: Tame This Money Beast

If you work hard and do well, it’s likely that your income will rise over time. That’s a good thing, right?

It is, but people often fall victim to what’s called “lifestyle inflation” as they get those raises. They make more, but they also spend more.

Lifestyle inflation is a big problem. More money doesn’t necessarily mean more security. The number on your check changes but the percentage spent on consumption vs. saving don’t look that different.

Regular monetary inflation can’t be helped. Money loses purchasing power over time. That’s why we invest, to offset long-term damage from inflation.

Lifestyle inflation, however, is a choice. It’s spending more than you make, regardless of your income.

A lot of times it happens because of the crowd you run in, the classic “keeping up with Joneses” conundrum. They get a new car, you get a new car. They get an in-ground pool, you get one. And so forth.

If you have a shopping problem, that’s an obsession if it’s not out of control. Going out to eat all the time is another concern but not unconquerable.

Things can get out of hand, however, if your friends make more money than you. When we socialize, the urge to spend freely is strong. It’s a financial problem rooted in social pressure. You don’t want to look like you can’t keep up.

There is a solution: Be the one who suggests things to do, instead of the ringleader friend who makes more than you and maybe others in your circle.

If she says “Let’s cruise Europe!” your suggestion could be “Let’s drive to the beach here!” Most likely, the others in the group quickly will agree with the lower-cost option.

Social pressure

The most dangerous lifestyle inflation, however, comes when your fixed cost of living is rising at a very high clip. This is the cost of your housing and cars, but mostly it’s housing — the mortgage, upkeep and property taxes.

People often buy a bigger house or a more expensive house than they truly need. It then takes more money to maintain. If something breaks, it’s going to be more costly to fix.

I find that a lot of people have trouble retiring because of housing choices they made, rather than simply going out to eat too much. Once you’re in a comfortable house you don’t want to move. Nor do you don’t want to look like you can’t afford it.

The other spending areas are easier to pull back on. Going out to eat less often is not necessarily obvious to others.

But if you get a lesser quality car, that’s visible. If you move into a smaller house, that’s visible. 

When I sit down with people whose houses are wildly inappropriate to their incomes, it’s hard. People say they’ve put a lot money into a home, they say “When I come home I feel like I’m on vacation.”

Nevertheless, those housing bills have to be paid. It’s like a business with huge overhead. There’s no room for error, and no comfort in your financial life as a result.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.