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Calming Desires for Lifestyle Inflation by Jordan at Investing Blog

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What is lifestyle inflation?

Have you ever felt like no matter how much you earn, you never end up with that much money? Or maybe that your expenses always suck out every last dollar of your income? It’s probably due to lifestyle inflation.

Lifestyle inflation happens when we, as consumers, increase our own personal “standard of living” as our income increases. A near majority of people drive a beater when they’re 16, a new economy car in their twenties and a luxury car in their fifties. As their income increases, their taste in cars grows more expensive. This is probably one of the most common places for lifestyle inflation to appear, and sadly, one expenditure that has the worst ROI. (Consider becoming a one car family. Now there’s some serious savings!)

The worst part of lifestyle inflation is that it is most always fueled by deflation of your later lifestyle. That high priced automobile you buy in your thirties, whether you realize it or not, costs you five, ten, and even 20 years in the future. That’s money you could have had when you’re most likely to need it the most, in retirement.

Fighting Lifestyle Inflation

Lifestyle inflation is most commonly associated with routine and regular purchases and payments. An automobile, for example, is financed over the course of a few years into many small bite size pieces. When we go to purchase a car, most of us purchase the payment, and the car comes secondary. We shop for what we can “afford” (read: squeeze into our budget) instead of what will get the job done. A used Honda Civic might turn into a new speedy Del Sol when we see it “costs only $60 more per month!”

Besides cars, houses seem to fit into the whole monthly payment problem. A single home isn’t an investment, it shouldn’t be a substitute for your bank account, and should realistically take up only 30% of your take home pay. Also, realize that appreciation in your home value has not made you wealthier, as if you were to sell your home and buy another, it is likely that home would’ve risen equally in price, as well.

Lifestyle inflation doesn’t have to be so obvious. You might go out to eat 2 times a week instead of your previous one night a week. Or you might grab a latte every day before work where you used to make coffee at home.

Easy Fix to a Big Problem

There are two steps you can make to maximize your savings and minimize your lifestyle inflation. First, target percentages for savings, not dollar amounts; 20% of your income, for example, instead of $10,000 per year. With a percentage, your savings rate grows with your income.

Another solution is to ignore raises. As your income grows, treat yourself to a one time splurge, but avoid any large, residual changes in lifestyle. Its the small changes that make the biggest difference.

About Jordan

Jordan is the web master of www.investingblog.org, a site dedicated to skillful investing, news and recent trends. You can read the original article here.

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