How to Avoid Lifestyle Inflation

Dollars and Sense

How to avoid lifestyle inflation

When your cost of living increases faster than your earnings, you find have lifestyle inflation. Use these tips to try and avoid it.

By Cheryl Lock August 30, 2021


It’s a pretty good time to be in the market for a new job. Not only is the U.S experiencing a hiring boom, but wages are also on the rise. In fact, in many cases, job seekers are in such high demand that they've been able to take their pick from several companies, leveraging factors like salary, workplace culture, and benefits to make their ultimate decision.

This is all good news, of course—but there is also a hitch: As wages rise, some people find themselves inflicted by something called lifestyle inflation. Here’s what lifestyle inflation is, and what you need to know to avoid it. 

What is lifestyle inflation? 

“Lifestyle inflation often happens when people get a raise, and instead of redirecting that money towards a financial goal like paying down debt, building up savings, or increasing their retirement contributions, it goes towards monthly spending,” says Sophia Bera, Certified Financial Planner®, founder of Gen Y Planning

When this occurs, you might ultimately be making more money than you ever have before, but your salary increase may not be reflected in your savings or other financial goals. Jamieson Hopp, Certified Financial Planner® with Millennial Wealth, uses the example of an individual who was making $60,000 per year and spending $2,000 per month on expenses. If that same individual were to get a pay increase to $70,000 but then starts spending $3,000 per month as a result of their increased income, this would be an example of lifestyle inflation. “The problem is that their increase of $1,000 per month—or $12,000 per year—in expenses is now above their pay increase of $10,000,” Hopp explains. 

Why lifestyle inflation occurs 

 The issue ultimately boils down to people having an unrealistic sense of what they can afford based on their income level and expenses, although a general rise in inflation has caused problems, as well. “Recently, we have seen general inflation rise sharply, which you may see at the grocery store or at the gas pump,” says Hopp. “When general inflation rises above wage inflation, you tend to see increases in lifestyle inflation, as the prices for your everyday common goods increase.” 

To top it all off the pandemic hasn't helped, either. After almost two years of dealing with Covid, “I think a lot of people are using online shopping to try to make themselves feel better,” Bera added. 

3 tips to avoid lifestyle inflation 

There are a few things you can do to help put an end to lifestyle inflation in your own life — or at least to avoid having it cancel out your raise altogether. 

1. Create a budget 

If you haven’t already, creating and sticking to a budget is an easy way to live within your means. Whether you use a simple spreadsheet or an online tool, Hopp recommends being honest with yourself about what you actually need to spend and working on a plan for large expenses down the road. 

2. Use your raise strategically  

Bera recommends immediately redirecting any new increase in pay towards your financial goals. Do this before you have a chance to spend it on anything else, so you don’t get used to living off your new salary. “Start by bumping up your 401(k) by a few percentage points,” she says. “Then take a look at your emergency savings and send a percentage of your paycheck directly to your savings so it skips your checking account. If you don’t see it, you won’t spend it.” Lastly, if you’ve been trying to get out of debt for a while, Bera recommends using your new earnings to create a plan you can stick with. 

3. Allow for splurges 

Although the above things are important—budgeting for the basics, saving for retirement and emergencies, and paying off debt—Hopp suggests including some reasonable increases in your expenses when you receive a raise for the things you enjoy. “As long as the increase doesn’t hinder the accomplishment of your goals and is built into your budget, you’ll be less likely to overspend with that new increase in cash,” he says.

Becoming aware of lifestyle inflation—and how you can avoid it—not only keeps it from upending your financial achievements but helps you maintain financial wellness. Upwise can be an additional resource to help you build on positive financial habits and make the most out of your money. 


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