Lifestyle Inflation - When Does It Become A Problem?

by golbguru on June 12, 2007

The idea for this post came after observing my brother graduate out of school, and his efforts to “upgrade” his lifestyle according to what he deemed “proper” for a professional engineer working in multi-billion dollar firm. I shouldn’t really single out my brother because 99% of the students I know have gone on a similar path - it’s just that I wasn’t close enough to them to be able to observe their attitudes over an extended time frame. Anyways, coming back to lifestyle inflation, I think it probably starts gaining strength when you experience a “significant” event in your life - like graduating out of school and getting on a job, making a large ticket item purchase (house, car, etc.), marriage (may be even engagement), getting a raise, etc.

To make this a bit clearer, in the following, I will resort to some crude graphs along with my narration. I will stress here that these are my personal opinions; you may probably have a different story to tell - in which case we would be pleased to hear about it.

First of all, I don’t think lifestyle inflation is something really bad. I consider it to be an essential element of life - as long as it is within reasonable limits. For example, you don’t need to drive a junker all your life - sometime down the line, whenever it’s feasible (affordable and within your means), it’s OK to upgrade to a reasonably better car and save yourself some headache. It’s OK to wear better clothes, it’s OK to wish for a bigger apartment, a better computer, and whatever else that you want. But all this is OK as long as you are *reasonable* - mind you, the word is highly subjective and individual perceptions will most definitely differ from each other. What I mean by reasonable is this:

this lifestyle inflation is OK

It’s a graph of rate of earning/spending ($ per day or $ per month, etc.) vs. time (months, or years, etc.). With reference to the graph above, as long as your rate of spending is less than your rate of earning, your lifestyle inflation is totally normal.

Problems arise when your lifestyle inflation exceeds your income inflation - you start spending at a rate more than the rate at which you are earning. This shown below:

this type of lifestyle inflation is not good

Like I mentioned in the opening paragraph, my observation is that the maximum danger from out-of-control inflation arises when you go through some significant events in life and decide to reward yourself for your accomplishments (or celebrate a milestone, etc.). To understand this, first let us assume some “normal lifestyle inflation” - something that’s within reasonable limits:

let's assume a

Now, let’s show some significant events (”moments of excitement”) on the time line, and see what happens to your rate of spending:

beware of this inflation

Most people tend to spend at an increased rate during events like marriage, buying a house, a car, etc. This is perfectly understandable. However, what happens is, long after the event is over, people don’t tend to come back to their “normal” state. Why? Honestly, I don’t really know; probably they get used to the higher rate of spending and there is some sort of a financial inertia that doesn’t allow them to come back to their normal rate of spending. It is around such events that you should be really careful - this is the time lifestyle inflation will first start nibbling at your pockets.

What you ideally want is this:

you should try and get back to normal

You can spend at a higher rate during the significant events, but after that you need to put in considerable efforts to bring your lifestyle back to normal spending levels. I understand it’s always easier said than done - but that is what needs to be done - and it would take a lot of self-control and determination to achieve that.

Have you observed something like this? Or perhaps something else about lifestyle inflation?

Before you go, here are some articles from other bloggers about lifestyle inflation:

  • Tasting Up by Wanda - featured earlier on this blog as a guest article.

Related Articles:

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{ 23 comments… read them below or add one }

1 stidmama 06.12.07 at 9:06 am

Wow. This is so clear and so perfect, especially when taken together with “A Consumerist Thought for The Day.”

In college accounting and business management classes (and forgive me for not remembering the right words, it’s been 20 years…) I recall talking about this sort of thing. Sometimes, a business needs to drawn down savings or incur debt for something essential. And it is okay to take advantage of unforeseen opportunities that weren’t in the budget. But only when the long-term benefit will outweigh the costs (interest, fees, other losses).

The principal is the same in personal life. We have had unexpected opportunities (the windfall that gave us a downpayment for our house for example) and costs (medical bills); but overall we try to spend only what we actually have.

One thing your graphs and calculations leave out though, is inflation. Over the years, while my husband’s salary has increased, our basic costs of living (power, food, transportation) have increased more. Our children, being older, have some needs they didn’t in the past. Along with the need for a newer car (adding monthly payments and increased insurance) a couple years ago, expenses have sucked down nearly all discretionary income. We have, effectively, a decreasing standard of living because we really do try to live within our means.

It would be nice if the “media” and school classes reflected this reality: not everyone lives in big, fancy houses; nor drives new cars; nor takes vacations that require sleeping away from home. In fact, most people don’t. The unrealistic expectations we have for lifestyle are contributing to living beyond our means (incurring long-term debt).

Maybe “lifestyle inflation” wouldn’t be so attractive if folks worried less about appearances and more about realities.

2 Corndogdriver 06.12.07 at 9:50 am

I really like this one. Well done. Goes back to the “income does not equal wealth” misunderstanding too many in our culture suffer under. If I graduate from college and get a job making $100,000/year, there’s going to be a real tendency to develop toxic life-long spending habits because I feel “rich”. Staying within the paradigm illustrated by your first graph will lead to success.

Oops there I go being all rigid and closed-minded again.

3 golbguru 06.12.07 at 10:00 am

stidmama: “Maybe “lifestyle inflation” wouldn’t be so attractive if folks worried less about appearances and more about realities.” - that’s the bitter truth we got to face. It’s probably in our society and the attitude is going to take a long long time to change.

Corndogdriver: You haven’t left anything to argue here. :) But I am not taking the monkey off your back on the credit card post…on that I still disagree with you. :)

4 Corndogdriver 06.12.07 at 11:13 am

Some things work, some things don’t. You guys’ insistence that credit cards “work” for you is just you refusing to believe that the people who spend hundreds of millions of dollars annually learning everything there is to know about consumer spending behavior could possibly be ahead of you. They are. They know more about what you buy, why, when, and where than you do. You’ve given them access to every bit of that data which they long ago put to use creating a customized marketing plan just to get you into about 18 credit cards and to make it unthinkable for you to cancel any of them.

5 golbguru 06.12.07 at 11:38 am

Corndogdriver: let’s discuss that in the appropriate thread; I shouldn’t have mentioned about it here…but that’s ok.

Let us steer this comment thread back to lifestyle inflation and how people perceive it. I am thinking over stimama’s comment on inflation - and earlier sort of came to a conclusion that the observations won’t change even if you take inflation in picture. However, this part of the comment “We have, effectively, a decreasing standard of living because we really do try to live within our means.” throws that out of the window.

It looks to me, at this time, that if income doesn’t keep up with inflation (currency value inflation), then that will essentially lead to a situation shown in the second graph - “you-are-in-trouble inflation”. However, stidmama is doing exactly what I would have recommended - compensate the burden due to inflation by decreasing the standard of living (I am assuming that the possibility of increasing the income has be addressed and discounted before this). I am sure it must be requiring a tremendous amount of self-control to decrease your standard of living in such situations.

6 Maria 06.12.07 at 4:52 pm

I think that there is a sense of entitlement that comes after you have finished something as huge as graduating from college. All those years of scrimping by and dreaming are supposed to be in the past, because YOU’VE ARRIVED.

But by not coming down from that cloud, you’re setting yourself up for a lifetime of heartache and worse- debt!

7 plonkee 06.12.07 at 11:34 pm

I agree that there is a big sense of entitlement from finishing something like a degree. Probably because you’ve been saying to yourself “I won’t buy X now because I’m a poor student, but when I graduate I’ll be able to afford X and Y”.

Keeping lifestyle inflation down is hard. I mostly try to do it by keeping it at inflation. I seem to naturally want a little upgrade all the time, so I avoid making big upgrade decisions and stick with the little upgrades all the time. This might not be productive but it works for me.

8 Ambellamy 06.13.07 at 10:51 am

that’s really interesting…

i really liked the charted out graphs… and its good to point out that its okay sometime in your life to want better things and go get them as long as you get back on track.

kudos

9 Gaming the Credit System 06.13.07 at 11:06 am

The biggest problem with lifestyle inflation is that, even if the “healthy” kind happens (your first graph) it tends to follow the same trend as normal inflation: it’s very resistant to downward trends (deflation). So if you lose your job or your income goes down (blue line starts going down until it intersects the red line) it can be harder to shift the red line back down because you’re generally somewhat committed to car payments, mortgage, etc.

Anyway, I like your analysis and I agree with it. I just wanted to throw in one extra kink.

10 Andy 06.13.07 at 12:53 pm

Great graphs. Pictures tell the story. What the pictures don’t show is peer pressure. You succumb to life-style inflation when those around you — especially those at work — are living it up and expecting you to join them. It’s adaptation. By the same token, if you associate only with the frugal, you’ll find it perfectly natural to be that way.

11 J2R 06.13.07 at 2:42 pm

The healthy graph requires a lot of willpower.

Every time I get a raise, I say to myself. “Keep your spendings the same and put all that extra money in your savings.”

It’s hard, because with a raise, you are able to afford daycare centers, or help your parents more. We shouldn’t automatically associate more income with more splurging. Though I recon that’s probably what happens 90%+ out there :)

12 DC Portland 06.15.07 at 7:52 am

If you are interested in the psychological factors behind lifestyle inflation, please refer to “hedonic adaptation”. An understanding of this concept, which is basically a description of human innate behavior, is extremely powerful in achieving financial security. We are all affected by it. It is not a good thing (chasing after the gold ring and never getting there has created a lot of suffering in the world) but it is completely natural. Knowing that you are affected by it is a good first step.

13 MoneyNing 06.16.07 at 9:14 am

When I first got a job, I started spending much more money than I did in colleague. For the first time in my life, I had tremendous spending power. Instead of thinking that I can save all this money and try to get ahead, I was thinking that I can spend so much money and still be able to afford it. I totally upgraded my lifestyle during that “got a job” event.

Fast forward this three years, and I am spending less than half of what I have while almost making 30% salary. It started with me worrying that I will need lots of money for upcoming big events in my life (marriage, house, kids). Of course, having your own personal finance blog and reading other great ones like this one helps too since it helps you put your personal finances at the front of your mind.

Btw, great article.

14 used vans girl 02.04.08 at 4:26 am

Its easy enough to live without most of the luxuries in life but yet most of us don’t. We live in a society that encourages overspending and puts pressure on you to have the latest and greatest things. Every second advert you see on daytime tv is about loans, credit cards and encouraging you to go out and spend.

15 Nuages Gris 02.21.08 at 8:24 am

Regarding getting more pay and trying not to undo the benefit by frittering it away: I turn saving that money into entertainment by investing and tracking its performance.

Isn’t it a thrill when you have $XXX more per month and you can see your net worth increase at a higher rate? It’s so satisfying to see the graph trend upward over months and then years.

I manage this by sending a static value to my checking account, and any remainder into a saving/trading account. When a raise comes along I won’t see any of it in my day-to-day life.

16 Writer's Coin 05.22.08 at 3:24 am

This is very compelling. I am as frugal as they come but over the past three years I’ve noticed this “lifestyle inflation” thing happening. Now I have cable, a sweet TV, a Wii, a nicer apartment, a parking spot in the building, etc. But your first graph is the key: I’ve managed to do that while still saving more with every inflated step I take. That’s what has kept me from feeling awful about “upgrading” my life (which was really necessary if you ever saw my first place here in Chicago!).

Great post!

17 VAN MAN 01.23.09 at 9:20 am

I have a lot less money now than I did even when I was a student! Two kids, two cars, expensive house. But equally happy at both - diving a van in the uni holidays earning a few pounds or working into the night on boring projects?

18 bryan 07.08.10 at 3:16 pm

very interesting article; best I’ve seen on the subject. I especially like the diagrams because they get the point across without being too complex. I largely agree with Nuages Gris in that I like watching my investments grow (or cringe when they drop), but for the most part I avoid inflation by just not looking at my checking account for routine spending. As long as my pay goes up at the same rate as inflation then when I do occasionally check it then I think “Woah, I should move some of this to an investment account.” There are now lots of technological advances to move money for one so he/she doesn’t even see the extra to think of using it, but I’m too lazy to set up. In my experience, if you stay with what your used to then you can’t miss nicer things you never had to begin with.

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