Understanding and Ultimately Curbing Lifestyle Inflation

The first stage of fighting an opponent is understanding the opponent. In this scenario, we’re facing off with an ambiguous term dubbed in recent years: lifestyle inflation. Portions of lifestyle inflation are great and I highly encourage them, whereas, some types of inflation are negative or even destructive. Understanding lifestyle inflation may be the biggest piece of everyone’s money puzzle.

Understanding Lifestyle Inflation

The reason many millionaires don’t feel rich is because of lifestyle inflation or lifestyle creep, as some call it.

We make more, we spend more.

Some of that spend is well worth it. For me, it was a great day when I moved out of my parents house and started renting my own place with my own income.

Following along with my new sense of freedom, I quickly developed a knack for dining out with friends. The quality of food ranged from okay to good and for a long three months, I was spending more than I made.

This type of lifestyle creep was damaging to my health and to my wallet.

Despite reading books on managing my money, I still opted for the good and the bad of lifestyle inflation. Long story short:

Spending money is easier than keeping it.

Talk to any high paid lawyer or doctor and they might describe how they’re far from wealthy. Especially if they have a few hundred thousand in student loan debt.

As we earn more, we tend to upgrade different facets of our lifestyle. Many seek out a bigger home or nicer cars or fancier clothes. Our big one has been spending more on travel as we get older.

Once we upgrade one area, we’re thinking, “What’s next?”

Another danger for younger millennials is that our pay increases faster while we’re young and then slows down.

It is easy to start thinking pay raises are the norm.

We also fail to acknowledge some forms of responsibility that will be part of our budget in a few short years such as aiding older family members or providing for new children.

So, how do we keep what we want?

Curbing Lifestyle Inflation


Here’s the two step process I used to curb lifestyle creep:

First, view the daily cost as if it were an annual cost.

Simple and a great way to see how an insignificant leak will sink a large ship.

Second, view any potential savings as pre-tax IF our 401k is not maxed out.

An example is my old habit of ordering a $20 dinner every night. I’ll average out the daily cost at $25 to account for the occasional drink or two. At 365 days, the total cost of dining out each night was $9,125.

I still remember the first time I realized HOW HIGH that $ amount was. I couldn’t believe I was spending over 16% of my salary on dinner.

The thought crept in, “If I cook every meal, then the average dinner cost will be reduced to as low as $5. If I bank $20 in savings over 365 days, the total amount saved would be $7,300.”

(I didn’t end up saving $7,300, but I know it was close to $6,000.)

My favorite part of this process was when I used early savings towards maximizing my 401k.

Assuming a 30% marginal tax rate, a $6,000 post-tax savings is worth $8,571 in my 401k.

It still wasn’t easy to shift my behavior from dining out to cooking more, but thanks to the two step process, I was able to realize how much money I could save.

Curbing lifestyle inflation becomes much easier if we quantify our routines.

Gaining clarity on where we spend was tricky and almost scary, but we feel it has been well worth it for us.

What ways have you curbed lifestyle inflation in favor o?

-Matt

21 comments… add one
  • Brad - MaximizeYourMoney.com Feb 22, 2017, 5:30 am

    This makes me think of the Diderot effect: “The Diderot Effect states that obtaining a new possession often creates a spiral of consumption which leads you to acquire more new things. As a result, we end up buying things that our previous selves never needed to feel happy or fulfilled.”

    It’s a dangerous situation that far too many people find themselves in.

    • Distilled Dollar Mar 2, 2017, 8:04 am

      Interesting! I’ve never heard of the Diderot Effect and I’m glad it fits here!

      There’s another quote similar from my man Ben Franklin that I love, “When you have bought one
      fine thing you must buy ten more, that your appearance maybe all of a piece; ’tis
      easier to suppress the first desire than to satisfy all that follow it.”

  • Ryan @ Just Another Dollar Feb 22, 2017, 6:28 am

    Hey Matt, great post! Many of these topics also hold true for us. Taking control of our food budget has been a top priority recently and will save us $5-6k (not to mention a few pounds) this year. We limit ourselves to one lunch and one dinner out each week, enough to make the habits sustainable and still feel like we get a treat at the end of the work week.

    Your point about the financial impact of caring for aging family members is something I frequently forget when planning for my financial future with Alyssa. It’s especially important for me as an only child of divorced (and remarried) parents. I have 4 parents who will likely need some form of assistance from us as they get older. Have any of you found a good way to bring up this difficult topic with your own family? Talking about money has never been hard for me, personally, but so many people tend to feel very defensive any time the topic arises.

    • Distilled Dollar Mar 2, 2017, 8:09 am

      Thanks for the comment Ryan!

      For family members, I’ve let them bring up the conversation naturally. I’ve been somewhat open in the past about saving money for financial security reasons and FIRE. Having mentioned my plan to them, they in turn became a bit more open about theirs. This whole process took about a year, but I wasn’t in any particular rush. Best of luck on your situation!

  • Mrs. Picky Pincher Feb 22, 2017, 8:18 am

    I like the trick of viewing new expenses from an annual perspective. Suddenly $5 sounds much more expensive when multiplied several times.
    I curb lifestyle inflation by waiting a few days before buying something. This way I can make sure an item or service will suit my needs without inflating my lifestyle.

    • Distilled Dollar Mar 2, 2017, 8:12 am

      Great buying trick. I use a similar one depending on the price.

      $10 purchase means I need to wait one hour before actually buying.
      $100 means I need to wait one week.
      $1000 means I need to wait one month.

      The general principle can be applied based on the individual’s spending habits. So a big spender might have increments of 50/500/5000 for example.

  • Financial Panther Feb 22, 2017, 11:28 am

    My main thing to avoid lifestyle inflation is to just keep perspective. I’m not all that far removed from being a student, in my opinion, so all I do is try to remember that I was living perfectly fine as a broke student before. No need to upgrade my life just yet!

    • Distilled Dollar Mar 2, 2017, 8:14 am

      Well said and too bad it is easier said than done. Right after college my lifestyle definetly skyrocketed, primarily because I was paying for everything with my own income instead of using what I could as a student.

      Oddly enough, I’m living closer to my student lifestyle today than I was a few years ago!

  • SMM Feb 23, 2017, 8:28 am

    “If I cook every meal, then the average dinner cost will be reduced to as low as $5”.

    I agree and from a non-financial standpoint too, cooking can be a fun activity if all the family is involved. My son loves helping to throw veggies and other ingredients into a pot, stirring, baking things, etc. Now him eating those things, that’s a totally different story, lol.

    • Distilled Dollar Mar 2, 2017, 8:15 am

      Haha! I’m still convinced the “veggies are gross,” is a TV/culture thing. I’m sure he’ll swing around soon! 🙂

  • Dividend Diplomats Feb 23, 2017, 11:57 am

    Distilled –

    I couldn’t agree more with this post. It hurts and is sad when I see lifestyle inflation on younger professionals. Why? Because I have a great sense of an idea of what they are earning, and a great sense of the liabilities they are paying on – pay raise = new car. Next pay raise = vacation. They just aren’t getting further wealth wise today & tomorrow. It’s hard, but we just have to hope to touch as many people as possible with our articles and examples. Thanks for sharing!

    -Lanny

    • Distilled Dollar Mar 2, 2017, 8:18 am

      Thanks for the comment Lanny. I’ve seen the same thing you described. Part of it feels like a reaction to living so frugally as students and part of it might be because young people experience pay raises more frequently. It can be easy to fall into the trap of thinking, “okay, the first few pay raises will go to my lifestyle and THEN down the road, I’ll use pay raises for investing.” By the time we stop accumulating large pay raises, we’ve already built up the habits of the high cost lifestyle.

  • David Domzalski Feb 23, 2017, 8:47 pm

    Hey Matt,

    You’re a CPA, so you’ll understand this. Inflation creep made me think of Scope creep where the scope of the audit work unintentionally expands to include areas not previously under audit. And so it is with Inflation creep. We inflate our ability to purchase things by using credit. Both “creeps” end up in frustration and a sense of “how did we get here?”.

    My wife and I always seem to fall victim to eating out. We ate thousands of dollars worth of food. It was ridiculous. We’re on a budget now and have a much better handle on things. We replaced eating out with meal planning and sticking to a grocery budget. It helps, but I hate to think how much we wasted. I could kick myself! Haha.

    Great post. Thanks for sharing your thoughts with us.

    – Dave

    • Distilled Dollar Mar 2, 2017, 8:23 am

      Ah, Dave, bringing up bad memories from my public accounting days! Haha, scope creep is a great analogy here.

      I feel that happens a lot in construction too, where the original budget becomes maxed out with a large portion of the work left to go.

  • Liz@ChiefMomOfficer Feb 24, 2017, 6:08 am

    Isn’t it amazing how seemingly small regular expenses add up to huge amounts over time? Take the habit many of my co-workers have of picking up a morning and afternoon coffee at the office. Coffee costs about $2 each time, so they don’t think it’s a lot to spend. But $2 twice a day is $4. Spending $4 five times a week is $20. Spending $20 per week costs $80-$100 per month. And overall, you’re spending $1,000 per year. ON BAD COFFEE. Over five or ten years, you would have $5k or $10k! Would you rather have all those long-gone, empty coffee cups or a fabulous trip? Maxing out your 401k or IRA? I’ve found people are inherently bad at calculating the impact of small amounts of spending-or saving-over long periods of time.

    • Distilled Dollar Mar 2, 2017, 8:25 am

      Crazy!! I love the coffee-OR-trip frame of mind. A few friends point out our frugality and mention we don’t enjoy life, but then we mention how happy we are PLUS we get to travel a lot more. What they also miss and we don’t typically shed too much light on is the level of investing we’re doing as well.

  • Matt Mar 4, 2017, 9:01 am

    I’ve been trying to come up with ways to make retirement planning more straightforward and less intimidating than “you need to be able to replenish 80% of your salary”. I think the easiest to explain (and most effective) is using the 4% rule of thumb as a guide for multiplying monthly or yearly expenses.

    So when it comes to lifestyle inflation I can’t help but think of it in terms of money spent today, but additional money that I’ll have to save to cover that expense. Any lifestyle inflation means less money to save now and increases the amount you have to save later.

    There also seems to be a continuing trend of expanding monthly bills – more people are leasing cars and have services like Netflix and Spotify and cell phone plans – which makes sense. Adding $10 a month for Netflix or getting a new car for “only” $200 a month seems like a good deal. Multiplied by 300 months and that’s a whopping $63,000 extra you have to save to maintain that lifestyle indefinitely.

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