A Little Lifestyle Inflation is Okay…You’ve Earned It

Most of the financial advice you will ever read talk abouts cutting costs to get your spending back in line with what your income is. If you find yourself in debt, you do need to cut back on some of the extravagances of life for a while. The more you cut back, the faster you pay off your debt. The faster your debt is off your shoulder, the faster you can get back to enjoying life.

But when we have a financial discussion on cutting out lattes (or energy drinks, or Netflix, or whatever your version of “the lattes factor” is), you have to wonder if you must cut out lattes for the rest of your life. Can you ever go back? Or should you banish lattes to the likes of Robin Leach and Lifestyles of the Rich and Famous, never again to be enjoyed? In short, is it okay to have some lifestyle inflation in your life? Is it okay to slowly raise your standard of living over time?

vacation relax

What is Lifestyle Inflation?

Lifestyle inflation kicks in when any extra income you generate (either through an annual raise or otherwise) goes straight into improving your lifestyle. If you get a 3% raise you suddenly find expenses have also increased to consume that 3%. That raise has essentially been wasted on whatever has crept into your budget from an expense standpoint.

This can also be influenced by “keeping up with the Joneses“. Just because the neighbor down the street upgraded part of their home, you decide you need to do the same. He got a bonus and bought a boat, so you take your bonus to buy a boat as well. It’s a destructive cycle.

How Can Lifestyle Inflation Be Bad?

Lifestyle inflation is many situations can be devastating to your financial situation. If you are lucky enough to get a raise or bonus, part of that extra unexpected income should be used to shore up your financial situation. Just because you have extra money doesn’t mean you absolutely need to run out and spend it. Why not stick it in a savings account for a rainy day or use it to pay down part of your debt?

If you are in debt you should try to avoid lifestyle inflation because any extra expenses you add to your budget will detract from your ability to pay your debt off faster. Even if you aren’t in debt, extra money should go through a decision making process so you don’t go splurge all of it. It’s okay to spend some of that bonus, but can you really afford to not make wise decisions with your money? Maybe your emergency fund is a better place for the money to be utilized this time.

When is Lifestyle Inflation Okay?

I think we can all agree that lifestyle inflation can be harmful to your financial situation in certain scenarios. But is it ever okay to increase your lifestyle costs?

This is where a lot of personal finance advice falls short. We ask you to cut your expenses to the bone, but don’t give you any wiggle room to get back to a more comfortable lifestyle at any point in the future. That’s not sustainable, and over the long term is unhealthy. You can’t live under constant pressure to keep every single cost down for the rest of your life.

There are times when money is to be enjoyed. Hopefully you go to work because you love what you do. You get some satisfaction out of work, but you also get paid. And that money can be enjoyed and not just partitioned out to the bare necessities in your budget.

When is lifestyle inflation acceptable?

  • If you have no debt
  • If you have a solid financial plan and know where you and your family are headed
  • If you are maxing out your retirement accounts (or are at least saving as much as you deem necessary to retire)
  • If you have an emergency fund

So if you get a raise or a bonus, enjoy some of the money. If you get a 3% raise, increase your 401k contributions by 1%, save an extra 1% into your savings account, and spend and enjoy the last 1% of the raise. There is nothing that says you have to spend (or save) all of your raise. Be smart about it, and get back to enjoying life.

Image from Wikimedia Commons.


By , on Oct 29, 2012
Kevin Mulligan Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He's building a personal finance freelance writing career and has written for RothIRA.com, Discover Bank, and many others.


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{One Comment}

  1. If ever I get that amount of bonus, half of it will go to savings and the other half for high interest debt. How I wish I can get that amount of bonus from my online work :)

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