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What is lifestyle inflation & how does it affect your budget?

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Knowing how to create and stick to a budget is a beneficial skill for everyone. But over time, many people—of all ages and incomes—fall victim to lifestyle inflation, which can quickly derail your money management.

Also referred to as "lifestyle creep," this phenomenon happens when your spending increases along with your income, sometimes so gradually you don't notice it. While getting a raise or switching to a higher-paying job is undoubtedly positive, not knowing what to do with extra income can end up straining your finances in the future. With a little careful planning, you can avoid lifestyle creep and retake control of your budget.

The budget drain of inflated living expenses

If you're not conscious of your budget, lifestyle inflation can cause your spending to spiral out of control.

Let's say you make $50,000 per year in your first job. After a few years of consistent raises, you are now making $70,000 per year. Because you're making a higher income, you decide it's time to replace the beater you've driven for years with a new car. Once you get it, you feel more confident. And then, suddenly, you think your new car is perfect for that big—and expensive—road trip you've always talked about taking with your friends.

If you aren't paying close attention to your money and adjusting your budget accordingly, you may find yourself still struggling to make ends meet despite having a higher income. When your income goes up but your spending doesn't stay the same or go down, it's much harder to put money toward savings or extra debt payments. This can lead to financial stress in the long run.

Other things contribute to lifestyle creep, too. As your income rises, you may be tempted to indulge in:

  • A more expensive lifestyle—paying a bit more at times for things you previously skimped on.
  • Bigger purchases like a new home or an additional car.
  • Spending more on smaller indulgences, like dining out or subscription services, that cumulatively add up to serious expenses.

Avoiding lifestyle inflation doesn't mean that you can't reward yourself

Let's be clear that there's nothing wrong with rewarding yourself when you get a promotion at work or reach a milestone. In fact, it's healthy to choose specific categories of your life to splurge on as long as they align with your values and your available budget.

What's challenging about lifestyle inflation is that it can cause you to fall into debt if you're not prepared to incorporate it into your financial plan. You want to avoid spending more money that you actually have. And that can, in turn, make it difficult to save for future goals, like starting a family, traveling and retirement.

6 ways to fight lifestyle creep

If you're already dealing with the effects of lifestyle creep, all is not lost. You can take actions to address the problem head-on.

Here are a few things you can do:

1. Be aware of what you're spending

Take a close look at your spending patterns and figure out where your money is going. Are there any areas where you can cut back and adjust? Getting back on track isn't about giving up everything. It's about increasing awareness around your spending and deciding what your financial priorities are.

When you're about to buy something new, ask yourself if it's something you really need or if you want it just because it's new. You might even keep tabs on what you do buy every month so you can know where your money went. This is a great way to see plainly if you're increasing your spending without realizing it. Creating a plan that breaks down your spending into buckets that include essentials, savings and discretionary spending also can help you automate some of your spending decisions.

2. Create a budget

Once you have a good idea of what you're currently spending, it's time to create—or revisit—your budget. This bit of planning will help you keep track of your income and expenses so you can make sure you're spending within your means.

It may be easiest to use a budget app, like the one offered by Mint. Start by listing all your income sources and each of your expenses.

  • Does your total income cover your total expenses with money to spare?
  • Or do you need more equilibrium between what you earn and what you spend?

Budgets are meant to be flexible, so shuffle the numbers around until you find an income/expenses balancing point that feels reasonable and doable to you.

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Get free 1-1 coaching

If you're struggling with increased expenses following a boost to your income, coaching through Thrivent's Money Canvas program could help you get back on track. Money Guides can help you see your money in a new way and build healthier budgeting, saving and spending habits.

Learn more

3. Prioritize creating an emergency fund

Having enough in emergency savings is a cornerstone of good financial health. However, Thrivent's Consumer Financial Outlook Survey found that more than half of Americans (60%) said they would be concerned if faced with an unexpected $500 expense.

At Thrivent, we recommend holding an emergency savings account that has three to six months of living expenses as a safety net. When your income goes up, funnel the extra money to that savings account instead of upgrading your lifestyle. Then, if you ever do have a surprise expense or a drop in income, you'll have a financial cushion to fall back on and can avoid accumulating debt.

If you want to start an emergency fund, a common guideline is to break down your savings goals into manageable chunks so that it doesn't seem so daunting. For example, if you wanted to save $1,000 in three months, you could try to put away about $80 per week.

When you reach your emergency fund savings goal, you can shift to tackling other financial goals you want to focus on, like paying down debt or saving for retirement.

4. Make a plan to pay down debt

If you're already in debt, make a plan to pay it down as quickly as possible. Two common methods include:

  • The snowball method. This involves finding your smallest debt and paying down the balance as quickly as possible while making minimum payments on everything else. This gives you a quick win, building a feeling of victory and momentum. You can then start putting all extra payments toward the next-smallest debt, creating a snowball effect.
  • The avalanche method. This approach involves paying down the debt with the highest interest rate first while making minimum payments on other debts. Once that debt is gone, you aren't paying quite so much in interest costs, and you can start working on the debt with the next highest interest rate.

5. Pay yourself first

If lifestyle creep has left you with less money than you'd like, it's time to start saving. Begin by adopting the "pay yourself first" method. This approach has you put a portion of your paycheck into your savings, retirement, emergency or other goal-based savings accounts before you do anything else with it. After a month or two, you likely won't even notice this sum is "gone" from your budget. When you add to your savings immediately after you get paid, your monthly spending naturally adjusts to what's left.

Once you have a cushion built up, you'll be less likely to dip into it for nonessential purchases. A great way to build up your savings quickly is to automate the process. You usually can set up instant transfers to recur right after you get paid so a portion of your paycheck can go right into your savings. And commit to increasing the savings amount when you receive pay increases. If you pay yourself first through an increased savings amount, you'll be less likely to get into the habit of spending it.

6. Keep focus on your long-term financial goals

Finally, don't forget about your long-term financial goals. Knowing you have a big-picture plan can help you resist the temptation to spend unnecessarily. If, for example, you have it in your mind that you're saving to buy a house, you'll probably stop yourself from spending your sudden income increase on a vacation. Keep your eye on the prize and remember what's important to you.

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How to save money quickly

Most people want to save more money, but it's easy for life to push our savings goals aside. It is possible, however, to save more money in less time by creating a savings plan that is specific and measurable and challenges you to change old money behaviors.

Dive deeper

Stick with good habits to fend off lifestyle creep

Ultimately, lifestyle inflation can catch you off guard. But now that you know more about it and how it can affect your budget, you can be more proactive going forward. Remember to set a budget that works for you and is realistic. Keep tabs on your spending habits, be mindful of new purchases, and don't live beyond your means.

And above all, don't be afraid to ask for help; a financial advisor can guide you and help you reach your goals for the future.