What is Lifestyle Inflation?

We’ve all heard of inflation and if we’re savers, we’ll know that watching the rate of inflation (which indicates how much prices have risen and the fall in purchasing value of money) is important as savers: to make sure our savings interest rate beats inflation and to spenders: to understand how much more we’re paying for things.

Lifestyle inflation is increasing spending in line with an increase in income. If you drive a three-door Peugeot on a salary of £25,000 a year and drive a different new car with each salary increase, you’ve increased your spending to match your newincome.

Why should I care?

You may be thinking why should I care? I work hard to earn my salary and with each increase I feel justified increasing my expenditure. If you’re in debt or have no savings though, you’d be an idiot to ignore the effects of lifestyle inflation. Whilst spending every penny on doing things you love or buying things you love (we’ll go into detail about ‘stuff’ later) makes you feel happy, I’d pose this question: What if your boiler breaks down or you need to replace the battery in your car? If you rent, what if you lose your job? Would all those experiences and things make up for the fact that you’re now going to have to take out a loan to cover the basic cost of living or fixing something? No.

If you’re spending more after a pay rise, what are those expenses really bringing you? True happiness? A sense of accomplishment? A sense of superiority over your neighbours who only drive three-door cars? Truth is we can feel a ‘high’ after purchasing something new and shiny, but quite often the novelty wears off and you’re back to waiting for your next paycheck to get the next ‘hit’ for a new, shiny toy. Keeping up with the Joneses really isn’t worth the short-term hit. If you’re going to spend, at least invest in yourself – buy something you really need like a new shower because your old one is trickling out water now. Take a moment to consider your needs before hitting the shops. If you can’t create a good list of needs then skip the shopping trip until you have a good reason to go out and spend the money.

Spend more, save more

Lifestyle inflation isn’t necessarily something that you should completely avoid (unless that’s in line with your values). Lifestyle inflation is another ‘force’ within you that you should be aware of, so that the next time you do get that pay rise, you take a moment to increase your savings rateand your spending rate. My personal target is to match the increase in spending exactly with my rate of saving. That way, I’m taking care of myself now and in the future. If I lose my job tomorrow, I will still be somewhat unhappy, but I will be happier than someone who lives paycheck to paycheck because I have emergency savings to bridge the gap until I get a new source of income.