Beware of Lifestyle Inflation

Beware of Lifestyle Inflation 1

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.

The reason lifestyle inflation is so rampant is that we often work hard to receive our bonus checks, commissions, or raises and feel that we should reward ourselves with the previously out-of-reach luxury items like a new car, new handbag, or lavish vacation. After all, we earned it, so what’s the harm in cashing in on some of our hard work?

Well, for those individuals with all their financial ducks in a row, there may not be any harm in treating themselves once in a while (once all short and long-term financial commitments have been met). But for the majority, this is far from the case and results in a vicious cycle of earning more and spending more that leaves many Americans (a) in perpetual debt and (b) behind on saving and investing.

Tips to Avoid Lifestyle Inflation

More money doesn’t necessarily mean more financial stability—but it can! Here a few steps you can take in order to avoid upgrading your life each time you have an upgrade in income.

  • Eliminate Unnecessary Debt: Debt is a constant roadblock to your financial future. The more you accrue today, the further you will be from having the extra income to grow and preserve wealth in the future. Begin by using your extra income to pay off outstanding debts, starting with those that bear the highest interest first.


  • Max Out Retirement Contributions: As soon as you know you will be receiving more income, consider maxing out your retirement contributions. Since there are limits to how much you can contribute each year, you’ll want to do your best to fill that bucket whenever you can.


  • Automate More Savings: The easiest money to save is money that you don’t see first (and, therefore, aren’t tempted to spend elsewhere). As such, many individuals find it most effective to have their monthly savings or IRA contributions automatically debited from their account.


  • Live Beneath Your Means: No matter your income level, the single most effective way to get ahead financially is to live beneath your means. With income that is “unspoken for” in hand, you open up a world of choices for yourself. When your income exceeds your expenses, you’ll have the ability to invest for the future, catch up on lagging retirement savings, or even treat yourself once in a while.

Just because you can afford to spend more money, doesn’t mean you should. The key is to not let the extra income become necessary income. Contact us today to speak with a member of our team to discuss how Harbor West can help your family invest and build wealth for the future.

This information is provided for general purposes and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the information, please consult your Financial Advisor for individual financial advice based on your personal circumstances. Neither Harbor West nor Geneos Wealth Management, Inc. provide tax or legal advice. Harbor West is a division of NorthEast Community Bank. Securities and advisory Services offered through Geneos Wealth Management, Inc. FINRA/SIPC Investment Advisory and Financial Planning Services offered through Geneos Wealth Management, Inc. Investments are not FDIC Insured. Investments are not deposits of the financial institution and are not guaranteed by the financial institution. Investments are subject to risks including loss of principal.

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Regulatory Disclosure: The information on this website has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. This website is neither an offer to sell nor a solicitation to buy any securities. Gerard Gruber offers Securities and Investment Advisory and Financial Planning service through Geneos Wealth Management, Inc, Member FINRA/SIPC.  Investments are not FDIC insured. Investments are not deposits of the financial institution and are not guaranteed by a financial institution. Investments are subject to investment risks including loss of principal amount invested.