Have you ever found yourself postponing retirement contributions, debt repayment, or perhaps opening a college savings plan for the hypothetical day when you make more money? You keep promising yourself that when you get that bonus or receive that promotion, you’ll finally get back on track. If so, you aren’t alone. And there is not doubt that these are great aspirations to have.
However, the problem most individuals have is in following through on these long-term financial goals once the thrill of the increased spending power arrives in hand. This is the insidious phenomenon of Lifestyle Inflation and effects individuals of all ages and all income levels.
What is Lifestyle Inflation?
Lifestyle Inflation refers to increasing one’s spending when income increases. Rather than using the extra income to pay off debt, make larger retirement contributions, or fund to a long-term savings goals, individuals tend to escalate their spending to match their income—thus perpetuating the habit of living paycheck to paycheck and making it increasingly difficult to get ahead.
The Emotional Root of the Problem
Logically, the concept of lifestyle inflation is simple: if we spend all the extra money we earn, we make it impossible for ourselves to actually get ahead. It is for this very reason that lifestyle inflation affects individuals of all income levels—if you make x dollars and spend x dollars each month or each year, you’re left with zero at the end of the day (no matter how big or small x was to begin with). But emotionally, it’s not so simple.