Lifestyle Inflation: The Ultimate Financial Trap

Do you remember the first real paycheck you ever got? Not a pouring coffee part-time kind of paycheck, but one from a real, full-time-with-benefits, honest-to-goodness job? I know I remember mine. And while that salary would not have impressed most people, it sure impressed me. Suddenly, I was making more in two weeks than I'd scraped by on over the course of two months while in university. In other words, I was rich! (See also: Is Peer Pressure Keeping You Poor?)

So, I did what any highly educated, smarty-pants college grad would do — I spent every cent on new clothes. And shoes. And probably some other stuff I can't remember now. After all, in two weeks, my job would just give me more!

It wasn't long before I'd accumulated a lot of nice clothes and other things I hadn't even really thought of buying before. But here's the thing. Although I was making a lot more money, I still rarely had two quarters to rub together at the end of the month, just like in college. Only this time it wasn't so much my lack of income that was the problem, it was me.

Lifestyle Inflation

It's called lifestyle inflation, and it's what happens when you get a raise or some other financial boost that should put you ahead, but instead often leaves you in exactly the same financial position.

Once I could afford something better, all the trappings of my former lifestyle suddenly looked like a dingy, old version of me. Soon, I was shedding versions like a snake and its skin, trying to slither away from the discards as quickly as possible.

Caught on the Hedonic Treadmill

What I didn't realize is that while you may be able to buy a better lifestyle, it never really feels like a better life. Some people call the act of pursuing that lifestyle the "hedonic treadmill;" you can run as fast and as hard as you like, but you won't actually get anywhere. And if you really push it, chances are you'll fly right off and land face first in your own little slice of financial hell.

Fortunately, my job gave me the opportunity to learn about personal finance — and the skills to assess what I was doing with my money. I have, of course, enjoyed some lifestyle inflation since my college days; I have a car, I eat much less canned food, and my apartment is far from crummy (look mom, no ants!). But it hasn't inflated so much that I'm not benefiting from my bigger income. As a result, I'm able to save money for retirement every month, make extra payments on my mortgage, and stay out of debt.

Want to avoid falling prey to lifestyle inflation? Well, you're in luck, because it's actually as easy as shifting your perspective.

Remember What Makes You Happy

Sometimes a boost in income is almost like a switch in the brain. Suddenly, the car you drove so proudly looks like an old tin rattle bucket, and the $1 burritos you shared with friends are thrown aside for fancier fare. The thing is, when you think back to the days in your life when you were happiest or had the most fun, those memories are probably completely unrelated to what you were wearing, driving, or how much money you were spending. Chances are, they probably had more to do with where you were in life and who you were with.

Tight Budgets and High Adventure Go Hand in Hand

I once stayed in a filthy motel that was only sort of close to the beach. It was supposed to look like a cute Mexican inn, but the doors were only sheets of plywood with peeling red paint (seriously), and hospitality was definitely less than quaint — the inn keeper banged on the door at 9 a.m. to ensure we'd be out by checkout time. Oh, and did I mention that the front desk also served as a bar, and that both were manned by a one-armed, tie-dye clad man with a glass eye? You can't make that kind of stuff up. If my friends and I had been able to afford a hotel on the beach, one with real doorknobs and soft, soap-scented sheets, well, I wouldn't have this story to tell.

Financial constraints have their advantages. Not only do they force you to be more resourceful, but when you run out of options, you're likely to find yourself in some pretty crazy adventures. I can't say I'd go back to that motel, but I have to admit that most of the nice hotels I've stayed in haven't been nearly as memorable.

Take It Away Before You Can Spend It

It always amazes me when people can live happily enough on their salaries and then still find themselves unable to save more money when they get a raise. If they didn't have that money to spend before, why do they seem to need it so badly as soon as it hits their bottom line? The answer is, they don't, just like I didn't really need all that money from my first job — at least not for spending.

Fortunately, I got into the habit of taking some of it out of my checking account on payday and moving it to my savings account, or my retirement plan or, later, my mortgage. You can do the same. You just have to decide to do it. And if you want to indulge in a little of your newfound wealth money, go ahead and do it. Just be sure to split the difference to save for some bigger, more important financial goals.

Build Some Balance Into Your Budget

Avoiding lifestyle creep doesn't mean living your life as a crusty, closed-fisted money hoarder. After all, you probably work pretty hard for every pay raise you get, and you deserve to enjoy that extra money. So please, spend some of it on something awesome. Just not all of it. After all, if making more money just means continuing to live paycheck to paycheck, running up debt, and accumulating more stuff, you're really just working harder and harder without actually living better — or getting ahead financially. And that's just sad.

Feel Richer, Be Richer

Lifestyle inflation is so sneaky that it can creep up on you almost without you noticing. Suddenly, you're driving a nicer car, or even just moving up to brand-name cereal. There's nothing wrong with wanting to enjoy money, but I think the key is to actually enjoy it. Otherwise you can make all kinds of money without feeling the least bit richer for it.

Have you ever succumbed to lifestyle inflation? How did you walk yourself back to more sensible income and spending habits?

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Guest's picture

Great article. I abide by the "pay yourself first" rule. Whenever I start making more money I work on maxing out my ROTH for the year and making sure my emergency fund is fully stocked before treating myself to the luxuries.

Guest's picture

I recently just graduated college and got my first real job. When I initially started calculating how much I would be making, I was giddy and wanted to blow it all on things I could now afford post college but fortunately I write and read financial blogs daily and was able to make the smart decision to open a second checking account so I could give myself a monthly budget then shovel the excess money into the checking account to only use for rent and bills and accumulate month after month what is left over. I am currently debating opening a savings account so that I can set my monthly budget in one, transfer the left over money for bills and rent into the checking and what ever is left over can be put into savings for an emergency fund. But I need to sit down and really plan out a strategy first.

Tara Struyk's picture

Woohoo! You're way ahead of me. I had to work at a financial blog to absorb enough material for this to sink in:-)

Guest's picture

One consciousness-raising method we use to appreciate our abundance is to remind ourselves about the tragically large portion of the Earth's population that lives without tomorrow's meals in their possession.

Tara Struyk's picture

So true - and so sad!

Guest's picture

The best piece of advice I got to combat greed and lifestyle inflation was from the dean at my graduation: "Many years from now, when you are successful and well into your careers, just remember that during your time here you lived in a 10 x 10 foot 'room'...and you were completely happy."

Tara Struyk's picture

Great advice!

Guest's picture

Lifestyle inflation is often caused by an artificial perception that others can somehow afford the lifestyle they are living. You should have that same lifestyle if you are successful. Nonesense! They've got the luxury car, the brand name latest fashion, the must-have gadgets and frequenting the must-be-seen places.

What's behind the curtain? Maxed out credit cards, no emergency fund, little if any savings for retirement.

Guest's picture

Great advice. Lifestyle inflation can eat up 100% (or more!) of your income. This is similar to the tips I gave new grads about avoiding lifestyle inflation.

Pay yourself first is my favorite. If there is one thing you should do, it's this. But it's all great advice.