Budgeting

How to Combat Lifestyle Inflation

In a previous post, I introduced a concept called lifestyle inflation. Lifestyle inflation is the process of increasing spending as your income goes up.

This process is problematic because it keeps you from making progress toward your goals. If you upgrade your lifestyle every time your income goes up, you will end up with many nice things, but will be far from the goals most important to you.

So, how can you arm yourself against this destructive tendency? Here are five methods:

5 Ways to Combat Lifestyle Inflation

1. Know Your Priorities

The siren song of lifestyle inflation is that more/better stuff = happiness. Does money buy happiness? 

The answer is yes, but only to an extent.

Economist Angus Deaton and psychologist Daniel Kahneman tried to solve this question. Over 450,000 people were surveyed on their well-being (happiness). The survey included questions such as, "How satisfied are you with your life as a whole these days?" Next, they compared these answers with the respondents' incomes to determine if any correlation existed.

Kahneman and Deaton found that a rise in income did indeed bring along with it a rise in well-being, but only up to a household income of $75,000. Happiness essentially flat-lined above that point. This indicated that income above that point no longer brought an increase in happiness.

I think that $75,000 is an arbitrary number, especially across different regions of the country and the world. The key point to take from the study is this:

Your peak happiness lies at the point where the needs of yourself and your loved ones are comfortably met.

Anything more is a welcome addition, but does not contribute one iota to your well-being.

2. Know Your Baseline

There isn't a clearer analogy for lifestyle inflation than the cell phone. Look at the cell phone you have now and compare it with the first one you ever owned. Each year brings new innovations and ideas to the mobile phone market that makes older models obsolete. This gradual change has made us all expect certain features as "standard." If you don't believe me, try going out and finding a phone without internet access nowadays.

Lifestyle inflation does the same thing in our lives. Things that used to be luxuries are now essentials.

 
 

There is a psychological term that helps describe the above process, it's called hedonic adaptation. Hedonic adaptation begins with the acquisition of new things and experiences. When we first acquire something new, we experience initial excitement and happiness. But, as time progresses, these new things become more normal and your happiness reverts to your original baseline.

You need to know how much is enough in your life and be able to recognize the rest as excess. The better you can make these distinctions, the sooner you will be able to reach the goals that matter to you.

3. Stop Comparing

This one digs down to the root of the why behind lifestyle inflation. When you compare yourself to others, you will always be able to find someone who has something that you want. Comparison and jealousy are toxic to a happy life. Comparison leads us to buy things we don't need and be in a hurry to afford a life that isn't ours.

Comparison is the thief of joy.
— Theodore Roosevelt

4. Automate Savings

What's your first impulse when you get that coveted raise?

For most, they picture that item or trip that has always been on the fringe of their reach. They get that nicer car, take that trip to Disney, upgrade their home, or just plain splurge. They may even justify it in their minds, saying "I deserve this." or "I can afford this now." 

Now, there's nothing wrong with all those things, but they often get in the way of more important priorities.

Each raise should be automatically saved until you can figure out how to best use it. You may choose to keep it in savings, finally allowing you to have that emergency fund. You may choose to pay off that high-interest rate debt you have. You may use it to increase your retirement savings, or a myriad of other goals. 

In the financial footrace to reach your goals, you get there a lot faster if you're running. When you thoughtlessly spend each rise in income, you ensure that you'll always be walking, nay, limping, towards your goals. 

5. Gratitude

Do you want a cure for your discontentment?

The answer is thankfulness. Your jealousy and covetousness fade away when you spend time being thankful for what you have. When you fix your vision on what you don't have, you perpetually rob yourself of joy, as there will always be more to be had.

I guarantee you'll find it easier to save that pay raise when you're consistently grateful for the things, people, and circumstances in your life. 

I'll conclude with a quote from one of the most inspirational people of all time, Dietrich Bonhoeffer:

“It is only with gratitude that life becomes rich” 

Lifestyle Inflation: A Tale of Two Joes

What Is It?

Lifestyle inflation is the process of increasing spending as income goes up.

The first experience most people have with lifestyle inflation is in the transition from college into their first job. In college, someone will live with several other people to bring the cost of renting down. They will opt for the generic brands of cereals and foods over name brands to keep their grocery bill down (or eat Ramen noodles for every meal). They will share rides back and forth to keep gas costs low. 

Then they get that first job. They make a meager income, but compared to their college years, it's a fortune. Suddenly living with other people seems unacceptable. Generic foods have lost their luster, and Ramen has become the food of peasants. Their old car begins to look dingy and run down. 

It is easy to see this concept play out in this stage of a person's life, but it doesn't stop there. Lifestyle inflation lasts a lifetime.

A Tale of Two Joes

To help illustrate lifestyle inflation, let me introduce two people, Average Joe (AJ) and Extraordinary Joe (EJ). They are identical in their lifetime income, but vary in how they spend it. Check out Average Joe in the fancy graph below:

 
 

AJ's income goes up at a nice and steady pace throughout his lifetime. Each raise brings an upgraded lifestyle into view. No matter how much income he brings in, it never gets easier to make ends meet. Notice how AJ's "Needs" are in quotation marks. That's because AJ does not have an idea of what he truly needs.

Let's check out Extraordinary Joe (EJ):

 
 

EJ has the same exact income and raises throughout his lifetime as AJ. However, EJ takes each raise he gets and automatically saves it until he can figure out how to best use it. Sometimes he uses it to pay off debt. Sometimes he makes more retirement contributions. And sometimes he spends it. Notice that his needs increase throughout his lifetime, but they are not directly correlated with his income, like AJ's was. 

The Take-Away

The vast majority of people are like Average Joe (hence the name). Each raise is accompanied by a corresponding increase in lifestyle. As more income floods in, so do more things, or the same things upgraded. They can never seem to save as much as they need to and financial independence is always a mirage on the horizon. People living like AJ are slaves to ever-increasing want. 

On the other hand, an increase in lifestyle is not always a bad thing. Isn't that everyone's goal in making more income? To produce the type of lifestyle they want? Of course it is. The key point is that, when unchecked, a person's spending will always keep pace with their income. People need to be mindful of what their needs, goals, and priorities are. Everything else is excess.

 

Resources

Investopedia- Lifestyle Inflation