Combating Lifestyle Inflation For the Win

Have you seen those birthday cards that show how much a gallon of milk, a loaf of bread, and a gallon of gas cost back in various years? The usual reaction is “wow, I can’t believe how cheap things were back then!”

Except they weren’t cheap. They only seem that way in retrospect.

Two types of inflation

Inflation is (usually) a gradual increase in prices over time — and it’s a good idea to know how to prepare for inflation — but there’s another kind of increase over time that can be just as insidious: lifestyle inflation.

Pretend that your life is one of those birthday cards with the years on them. What would your spending look like back when you were just starting out?

Mine would look pretty basic. It’d say things like rent, car payment, car insurance, gas, parking, electricity, phone, groceries, laundry, credit card payments, student health insurance, plus a tiny bit of spending money (enough for one fast-food sandwich out per week.)

Then vs. now

Flash forward to now though, and things look pretty different. I have things like homeowner’s insurance, car insurance, life insurance, flood insurance, vacations, an iPhone, eating out a LOT, ongoing vet bills, things for my son, clothes, massages, gifts, charity, etc on my list.

If you’ve been established for any length of time, chances are you spend a lot more money now on things you couldn’t have afforded at all (or very much) back in the beginning. You have some luxuries, and maybe some higher priced items that are similar to what you had before, but nicer.

That’s lifestyle inflation: the tendency to increase your lifestyle as your means increase.

And that’s fine. We don’t have to live our lives in desperately-watch-every-single-penny-all-the-time mode once we’re making a little bit more money and/or have our finances under control.

Avoid overspending

But we DO have to be careful to combat lifestyle inflation so that we can win. It’s easy to tell yourself, “now that I’m making X, I can afford to do Y”. But what are the costs of doing so?

Avoid doing things like buying a bigger house or a more expensive car just because you can. Be sure that you’re first spending additional money to shore up your financial foundations. If you want to win and get ahead financially, you’ve got to keep lifestyle inflation in check.

Not going overboard is the key.