What is Lifestyle Inflation?

Lifestyle inflation, also known as lifestyle creep, occurs when your spending increases because your income increases. The more you make, the more you spend, resulting in a never-ending cycle of paying bills and trying to ‘keep up with the Joneses’.

Higher income comes with life-stages such as a promotion, starting your first full-time role or becoming a dual-income household. And while you may look at your bank account and think, “Wow, I can finally buy the [insert item you want here] I’ve been wanting”, you may want to stop and consider the impact that lifestyle inflation can have on your financial future.

Why should you care?

We are all susceptible to lifestyle inflation, in fact, it is common in our society to think that the more you have, the happier you will be. Social pressures make us believe that we need that car, that house or that handbag to feel satisfied-but financial security and independence has so much more to offer, such as early retirement or the ability to accept your dream job (even if it pays less).

Upgrading your spending habits to match your income (also known as spend creep) will limit your ability to build your wealth and can stop you from fulfilling goals, both financial and personal. It will also leave you vulnerable to unexpected expenses, if they arise.

If you find yourself falling victim to lifestyle inflation, here’s a few tips and tricks to keep you focused and help you invest in yourself and your future:

1. Establish financial goals

   If you haven’t done so already, evaluate your current financial situation and compare it to where you would like to be and what you would like to achieve 5, 10 and 25 years from now. What do you need to do between now and then to accomplish those goals? When you contribute extra income towards your long-term goals versus making short-term purchases, you’ll feel satisfied that you are progressing towards a better future.

   Establishing financial goals is an important step in long-term financial wellness. Working towards achieving these goals can seem difficult, but trust us, it’s all worth it in the end.

2. Redirect, automatically

   We get it, it can be hard to say no sometimes. To avoid this situation altogether, we recommend redirecting a percentage of your increased income into your savings or investment account.

   Use the ideology ‘out of sight, out of mind’ and boost your biweekly or monthly contributions to your savings and investment accounts! This way you’ll be investing in yourself first and won’t risk spending that money on something you don’t really need.

   Using our Budget Worksheet, identify how much you can increase your contributions within your new budget.

3. Determine what makes you happy

   Reflect on where you derive happiness from. This inner reflection will help you focus your funds on what really matters and keep you from comparing yourself to others and what you think you need based on their lifestyles. Just because your coworker bought a new sports car with his raise doesn’t mean you should as well! Although originally created to declutter your home, Marie Kondo’s ideology of only keeping items that ‘spark joy’ can also be applied to your lifestyle, if something doesn’t bring you happiness, it’s time to let it go.

   If spending time with family brings you joy, concentrate on saving for a family vacation. More often than not, spending money on experiences will produce life-long memories and happiness that can outlive any material purchase.

When should I spend money?

You work hard for your money and you should get to reward yourself every now and then! A certain degree of lifestyle inflation is to be expected, for example, moving from a condo to a house or purchasing a car that can fit the whole family.

When you reach a certain milestone or achievement that deserves a reward, consider spending your money on upgrades that will improve your quality of life and mental well-being. For example, if you would like to spend more time with your friends or kids, but are bogged down by household chores, you may want to consider hiring a routine cleaning service. This type of reward not only frees up your time to reprioritize friends, but also gives you peace of mind and a tidy house.

Taking measures to invest in your future versus upgrading your current lifestyle is harder said than done. Try to remember that by contributing towards your financial goals, you are prioritizing your happiness, financial independence and well-being long-term.

If you are ready to control the impacts of lifestyle inflation and build your wealth, ATB Prosper has you covered. ATB Prosper is the simplest way to invest—so you can hit your financial goals with less stress. Give our ATB Prosper advisors a call at 1-855-541-4387 with any questions about your goals.