How to Avoid Lifestyle Inflation

There’s nothing wrong with wanting nice things, however, you can avoid lifestyle inflation by trading short-term gratification for long-term success. One example of this is to hold off on buying that new BMW this year and making a bigger contribution to your retirement fund. The return on your money will be significantly better if you choose the investment over the expense.

The key to being successful with this is to put the work in. That pay raise will hopefully come your way at some point. Before that happens, ensure that lifestyle creep doesn’t take hold by training yourself to make better financial decisions. We’ve provided several suggestions below that may help you. Take a moment to review over a cup of coffee.

Create a Transparent Budget

It’s surprising how many people operate without a budget. They pay their bills with autopay and think that whatever is left over is “spending money.” That type of mindset makes it easier for lifestyle inflation to set in when you start making more money. Fixed expenses like rent or utility bills don't change when your income increases, but your spending bandwidth does.

A real budget is a spreadsheet of all your expenses and income, including one-off purchases and impulse buys. You should also track how you’re paying those expenses. Are you using your bank account, Credit card, or Debit card? Categorize your expenses for each of these payment methods. It will help you modify your spending behaviors.

We’re calling this a “transparent” budget because you’ll need to be completely honest when you put it together. A $10-per-month subscription for a news website might seem insignificant but it adds up to  $120 a year on that newsfeed. Do you even read it? Don’t feel bad if you don’t as there are many others in the same situation.

Eliminate Non-Essential Expenses

It is best to cancel any subscriptions you don’t use. While you’re at it, cut back on the take-out food you’re eating. These are both examples of “non-essential” expenses. They’re also the types of expenses that tend to multiply when you start making more money, a classic example of lifestyle creep. Eliminating these expenses can help you avoid that.

Another way to break this down is to separate your “wants” from your “needs.” You obviously can’t eliminate expenses like rent and utility bills. Those are essential expenses, aka “needs.” Your “wants” category is where you put premium movie channels and expensive designer clothing. You don’t need those any more than you need all that take-out food.

This is a big step towards becoming financially secure. We all have “non-essentials” on our list. Ask yourself which ones you’re willing to live without. This takes more than just crossing items off a list. You need to decide to eliminate those expenses. More importantly, you need to commit to keeping them off the list. That’s not easy to do but worth it in the long run.

Maximize Your Retirement Contributions

A budget review after eliminating non-essential expenses should reveal that you now have more money left over after you pay your essentials and living expenses. In the past,  you would look at that as “spending money.” However, by changing your thinking, since you started reading this article you can view this as money that can be invested for financial prosperity.

Are you not quite there yet? Let’s look at the math. The sticker price on a 2024 BMW M4 is roughly $78,000. According to Kelley Blue Book, you can expect a 20% depreciation on that car in the first year you own it. Increase that depreciation number to 40% over five years. In other words, you’re throwing away $31,200 just so you can drive a fancy car.

Investing in a retirement account produces an entirely different result. The IRS will allow you to contribute $23,000 to your 401(k) in 2024, and an additional  $7,000 to an IRA. That $30,000, with just a 6% investment return, will be worth $96,214.06 in twenty years. Contribute the same amount every year, and you’ll have over $2 million in 20 years.

Do-It-Yourself Whenever Possible

It should be obvious at this point that investing or saving money is the key to long-term financial security. Adopting that mindset is how to stop spending money and avoid lifestyle creep. Another good practice is to put yourself in do-it-yourself mode when it comes to services and repairs. You might be surprised with your own capabilities.

Here’s a good tip. Buy some tools. They’re an investment, not an expense, particularly if you’re using them for home or car repairs. Don’t forget to pick up a broom and mop while you’re shopping. Maid service is rarely an essential expense. Most people can clean floors and empty trash cans in their own homes. Save the money and do it yourself.

This is another example of changing your mindset to avoid lifestyle inflation. It’s easy to get carried away with paying money for other people to perform services and make repairs that you can do on your own. Search YouTube for an instruction video if you need help. Do it often enough, and you might find a side hustle you can make extra money with.

Avoid Impulse Buying and Binge Shopping

Changing your spending habits is embedded in the suggestions we’ve already made. Impulse buying and binge shopping are the “relapses” in the program. Some people look at a shopping spree as a “reward” for doing good for a while. That’s risky when you’re trying to avoid lifestyle creep. A day at the mall can easily trigger a long-term behavioral problem.

One of the ways to avoid binge spending is to stop using your credit cards. Better yet, consolidate them with a personal loan and pay the loan off, then commit to only paying cash. People tend to be more reluctant to spend when actual money is changing hands. Using a credit card is easier because the impact isn’t felt until the monthly bill comes in.

Another way to avoid this is to apply the same line of thought you used when eliminating non-essential expenses. Ask yourself if you need what you’re buying right now. If not, don’t buy it. Repeat this process a few dozen times and it will start to become second nature. Lifestyle creep won’t have a chance of taking hold in your life.

The Bottom Line: Avoiding Lifestyle Inflation a Process

Learning how to control spending habits is a process, not an event. Lifestyle inflation typically creeps in gradually. Most people don’t just start spending more than usual the moment they get their pay raise. It usually starts with going out for an expensive meal or a day of binge spending at the clothing store. Those behaviors might seem justified, but they’re just the beginning.

The suggestions in this article are a blueprint for changing your spending behaviors. That’s the only way you can avoid lifestyle inflation. Start by creating a budget, eliminate non-essential expenses, turn spending into investing by maximizing your retirement contributions, adopt a DIY approach, and don’t binge shop. These are the keys to financial prosperity.