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What is lifestyle inflation, and how does it affect your budget?

Woman analyzing documents while sitting at home
Young woman analyzing bills while writing in diary.
Morsa Images/Getty Images

No matter what stage of life or tax bracket you're in, knowing how to create and stick to a budget is a beneficial skill. 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.

Hypothetically, let's say you make $50,000 per year in your first job. After a few years, you get a raise and 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. Additionally, as you get older and settle into a career, you may start considering bigger purchases or status markers, like a new home, an additional car or a boat.

General inflation can play a role as well. As the cost of living goes up, so does the amount of money you need to maintain your standard of living.

The risks of not being prepared for lifestyle creep

Lifestyle creep can be negative because it often leads to people spending more money than they actually have. What might begin as new clothes or a new car can soon snowball into frequent higher-end purchases that strain your finances. The same applies to making several low-end purchases that cumulatively add up to serious expenses.

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.

But 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. And that can, in turn, make it difficult to save for future goals, like starting a family, traveling, and retirement.

How to avoid the pitfalls of lifestyle inflation

It's easy to gradually slip into overspending without even noticing. You might upgrade your car one year and take an expensive vacation the next. Before you know it, you might have more bills and minimum payments than you can handle.

If you're aware of the pitfalls of lifestyle creep, however, you can stay ahead of it. Think about aligning your spending with your values. Take some time and ask yourself, "what is most important to me?" Is it travel, designer clothes or seeing a concert every month? Then, consider how much of your discretionary income you want to spend on those items or experiences. As long as you're sticking to the guidelines you set for yourself, you'll likely feel more fulfilled if your spending matches closely with your true wishes.

Avoiding lifestyle creep is smart financial planning—you'll be more likely to stay on track with your goals and keep your finances healthy. Here are a few things you can do:

Have an emergency fund

If you have an emergency savings account—typically three to six months of living expenses put aside just in case—you can use it as a buffer against sneaky increased spending over time. 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. If you wanted, hypothetically, to save $1,000 in three months, you could try to put away about $80 per week.

It's a good idea to start small and increase your savings each month until you reach your emergency savings goal. And when you do, you can shift to tackling other financial goals you want to focus on, like paying down debt or saving for retirement.

Stay aware of your spending

It's important to make conscious decisions about whether or not you need certain items. Take note of how much you spend on things like coffee, dining out, or other incidentals. Once you see a total dollar amount across a month or year, you might decide you'd rather put that money elsewhere. Having a budget in place, and maybe even using an online budget tool, will help ensure you're not overspending in any one area. It also will help you make room for important financial goals, like saving for retirement or paying down loans or credit cards.

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.

If you're feeling down or like you don't measure up, avoid always trying to cheer yourself up with a new purchase. Emotional shopping is unlikely to solve the underlying issue. If you get the urge, try other coping mechanisms to help you move forward and feel happier, like going for a walk, reading a book, creating something or talking openly with a friend.

Similar to emotional spending, if you get a raise or a tax refund, rethink binging on a large, celebratory purchase. That's not to say don't ever treat yourself, but consider putting some of that unexpected cash toward your savings or debt. This will both help you avoid lifestyle creep and keep your finances on track.

Reach out to a financial advisor or Money Canvas

If you're struggling with increased expenses following a boost to your income, one-on-one 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.

If you want to create a strategy for saving for your financial goals, working with a financial advisor can be a great way to get on track as you make smart choices with your money.

How 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.

Track your spending

First, 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? If you're eating out more than you can comfortably afford, for example, you might only go once a week instead. 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.

Create a budget

Once you have a handle on your 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. 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.

Build your savings

If lifestyle creep has left you with less money than you'd like, it's time to start saving. Begin by setting aside some money each month to put into savings. 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 it. You can usually set up instant transfers to recur right after you get paid so a portion of your paycheck can practically 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.

Boost your income

It might seem counterintuitive to boost your income when a higher income is what caused your lifestyle inflation problems to begin with. However, if you're living above your means, bringing in another stream of income—even for just a little while—can help you pay down the excess debt you've acquired. Once you're back on track financially, you can decide whether or not to keep your extra income stream going.

Save up for big purchases

When you have a higher income, it's easier to convince yourself to buy things on credit because you can afford the minimum payments. Instead, try to save up ahead of time to pay for big purchases. This can help you avoid adding on debt while still keeping your everyday finances afloat.

Pay down debt

If you're already in debt, make a plan to pay it down as quickly as possible, whether that's by spending less money or making more income. Having fewer minimum payments can improve your monthly cash flow, creating opportunities to free up more money to save and invest in your future.

Keep your long-term financial goals in mind

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.

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.

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