Lifestyle Inflation
BeginnerLifestyle inflation is the tendency for a person’s spending to rise as their income rises, so that higher earnings lead to a more expensive lifestyle rather than increased saving.
When people receive a pay rise, bonus or new job, it is natural to upgrade: a bigger home, a newer car, more expensive holidays, eating out more often. Over time, these upgrades become normal and feel necessary, absorbing most or all of the extra income.
For example, someone whose take-home pay rises by 500 a month might move to a more expensive flat and lease a new car, leaving them with no more savings than before, despite earning considerably more.
Lifestyle inflation is sometimes called lifestyle creep, because it often happens gradually without a conscious decision. It can make it hard to build wealth, prepare for retirement or cope if income falls, since higher fixed costs are difficult to reduce.
A common approach is to decide in advance how to use pay rises, for example saving at least half of any increase and allowing the rest for improvements in lifestyle. Increasing automatic contributions to savings or pensions at the same time as a pay rise makes this easier. Enjoying higher income is reasonable, as long as it is a deliberate choice.
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