What Is Lifestyle Inflation And How Can You Avoid It?

If you’ve just received a pay rise at work, you might be thinking about all the ways you can spend the extra cash. From new items of clothing each month to a new apartment in a nicer part of town, there are tons of ways you could improve your lifestyle with the help of this extra cash, right? Wrong! Let me stop you right there and talk to you about lifestyle inflation…

What is lifestyle inflation?

In simple terms, lifestyle inflation is when you inflate your lifestyle with each pay rise.

Let’s imagine you go from earning £20,000 to £25,000. You might go from taking your lunch to work each day to eating out with your colleagues. That’s lifestyle inflation.

A couple of years later, you may go from earning £25k to £30k. You might sell the second-hand Mini you bought from your dad’s mate and get an Audi that you can only afford on finance. That’s lifestyle inflation.

If your career continues to progress, you may eventually go from earning £30k to £40k a year. You might might take this opportunity to buy your fOrEvEr hOmE, taking out a very large mortgage with high repayments in the process. Lifestyle inflation.

By the time you’re earning £80k, you might have the fancy lunches every day, the financed car, a massive house you don’t really need, perhaps a second home, several holidays a year, and so on.

Is lifestyle inflation a bad thing?

As your income increases as you progress your career, it’s only natural for you to upgrade your life in some ways.

No one’s expecting you to be living the life of a broke student when in reality you’re a solicitor with 10 years’ experience under your belt.

However, lifestyle inflation can lead to financial troubles if you take on too much debt and don’t have adequate savings to protect you in the event that your income falls again.

You may get to a stage where you’ve inflated your life so much that you’re drowning under bills and debt repayments. You may even find yourself in a situation where you don’t have much more disposable income than you did when you were earning much less.

If your income was to plummet, you’d be unable to keep the car, you could potentially lose your home & you’ll be acting like taking a cheese butty into work each day is the most impoverished act in the world.

How can I avoid lifestyle inflation?

So what’s the solution? Here are a few suggestions to avoid the pitfalls of lifestyle inflation.

Approach debt with caution

One mistake people often make as their income grows is to take on more debt than necessary. People often do this because they believe they can easily afford the repayments.

This can be troublesome for two main reasons:

1. If your income drops, you may struggle to meet the repayments
2. Debt can be expensive

If you already have debts, it’s probably wise to use money from your pay rise to work towards being debt free.

However, if you have UK student debt, it might not be worth paying this off early. Take a look at this post on student debt misconceptions to learn why.

As tempted as you may feel to buy the biggest house you can, if you’re taking out a mortgage, it’s usually wise to save a large deposit so your repayments are affordable and your interest rate is low. Buying a bigger home than necessary could leave you struggling to make repayments should your financial situation change.

Have emergency savings

Whether you earn £15,000 or £50,000, you need emergency savings. A healthy emergency fund will protect you from job loss, unexpected expenses, and drastic financial turmoil!

A smart way to save an emergency fund is to set aside a high percentage of each pay rise.

If you’ve just received a pay rise at work, I’d strongly recommend saving as much of that pay increase as possible.

Let’s imagine you’ve started earning an extra £300 a month. Is it possible for you to put £200 of it into a savings account each month? If you were able to get by on your previous income, this should be manageable.

Investments

Once you’ve built up approximately six months of expenses in a savings account, it may be wise to look at investment opportunities.

Don’t forget to make a pension a priority! The last thing you want is to approach retirement age and not have a substantial amount of money set aside.

Don’t compare yourself to others

A common mistake people make as their income grows is to continue comparing themselves to others. You might be earning £80,000 a year, for example, but telling yourself you’re not that wealthy because you can’t afford all the things Leslie from down the road can.

You may also find yourself hanging around with people who earn more than you, making you feel under pressure to spend more in order to fit in.

Be mindful of your limits and be honest about what you can actually afford. There’s no point overstretching your finances in the hope of impressing others.