Why Earning More Shouldn’t Mean Spending More

A few weeks ago I was out with a friend when she commented that she couldn’t believe how expensive life had become. A few years ago she would have only spent half of what she’s spending on an average weekend now and she assumed that the city we live in has just gotten too expensive. I could completely understand where she was coming from, except it’s not that our city is more expensive. We’ve fallen into the trap of lifestyle inflation.

“Lifestyle inflation” means you’re spending more as your income increases. It makes it difficult to get ahead because although your income is increasing you’re not actually saving additional funds. You’re finding ways to spend it: living in nicer places, going out to nicer dinners, traveling to more exotic locations.

Lifestyle inflation means you’re spending more as your income increases.

Lifestyle inflation isn’t necessarily bad. You work hard for raises and you should feel free to upgrade your lifestyle in some ways. Lifestyle inflation becomes a problem when you find yourself still stretched thin, even though you’re making more. It’s a problem when you’re not saving enough to be financially stable in the future, or your spending on things that don’t really matter.

It can be tricky to avoid the traps of lifestyle inflation, but these four tips below will help you to keep it check.

1. Update your savings plan as soon as you get a raise.

The trap most people fall into with lifestyle inflation is they are excited to get a raise and they don’t immediately increase their savings rate. It feels like a reward—you’ve worked harder, you’ve been recognized for it, and you should enjoy the extra cash, right?

It’s true that you should be able to relax your spending a little bit as you make more. But to be responsible with the raise, make sure you’re putting some of that extra cash into savings before you start to think about upgrading your life.

Let’s say you get a 10% raise after working your first year post-college. You’ll want to sit down and create a new budget to account for this extra income. Your first priority should be to put more money toward any extra debt you have. After that, put some of that additional income toward your savings, either in a retirement account or a rainy day fund. Your goal should be to put at least half of each raise—5% in this case—to savings.

2. Take a trip down memory lane.

Recently, my husband and I were looking for a last minute date night and we ended up going to a restaurant we hadn’t been to in years. We walked into the little hole in the wall Mediterranean joint with our BYOB bottle of wine in hand and had a fantastic evening. When the bill arrived and it was so much less that what we were used to paying for a night out, we were reminded that life used to be a lot cheaper.

Lifestyle inflation becomes a problem when you find yourself still stretched thin, even though you’re making more.

We used to go to this restaurant all the time when we were just a year or two out of college, but somehow we grew out of it as our incomes increased, we moved to a new neighborhood, and we started enjoying fancier date nights. But taking this trip down memory lane reminded me that we used to really enjoy simpler, cheaper events.

Take your own trip down memory lane and try to remember what you used to do years ago, when your spending budget was a little tighter. There are probably plenty of cheaper, or even free, activities that have slipped out of your usual rotation, even though you used to really enjoy them. Make an effort to bring these activities back into your routine as a way to cut back on lifestyle inflation—without feeling restricted.

3. Know what you truly enjoy.

One way to make sure you don’t fall prey to overspending (a big downfall of lifestyle inflation) is to stay mindful and focused on what you truly enjoy—the things that will bring you the most happiness when you spend on them. You will naturally spend more money as you make it, and that’s OK! But you want to make sure that what you’re spending money on is something you will actually enjoy, not just something you’re mindlessly buying.

For many people spending on activities, rather than physical things, is what brings them the most joy. Whether it be traveling, trying out a new class, or spending weekends exploring new areas of a city, if those activities are what will bring you the most joy, spend on them. Make a list of those activities and allocate extra money to them each month. By letting yourself spend more on the things you truly enjoy, you won’t feel like you’re depriving yourself of your hard earned raise.

4. Avoid peer pressure.

One big culprit of lifestyle inflation is peer pressure. As your income increases, friends’ incomes will likely increase as well. And if you’re not mindful of it, social pressure could lead to your lifestyle increasing beyond what you intend.

Avoiding peer pressure is hard, but it doesn’t mean that you need to sit at home while your friends are out enjoying an expensive evening.

If you want to enjoy cheaper activities with friends, come up with your own suggestions and activities that you know others will enjoy. You can suggest little swaps that will have a big impact on your budget over time. Try swapping a boozy brunch for a morning hike, or meet friends for a picnic in the park rather than an expensive day out.

For larger swaps, you may need to get a bit more creative and be more upfront with your situation. I was heading on a weekend out of town with some girlfriends and they wanted to book a hotel that would’ve pushed me outside of my financial comfort zone. Instead of just going along with it, I was honest with them. I told them that it would make my budget for the weekend a bit too tight but I found an awesome Airbnb nearby that would cut the cost in half. Since they didn’t have to do any additional work, they were more than happy to make the switch (and I’m sure they enjoyed saving a bit more cash as well).

While avoiding lifestyle inflation may not always be easy, putting a plan in place now will be a big help for your future financial health.

We’d love to know: How do you avoid lifestyle inflation?