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What is lifestyle inflation?

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Congrats! All your hard work paid off and you finally got that raise you’d been striving for. In the midst of celebrating, suddenly that ritzy vacation, that costly furniture upgrade, or those expensive shoes come calling. 

It’s fine to treat yourself from time to time, especially to mark a milestone achievement, but when spending big becomes a long-term habit, you may be succumbing to what’s known as lifestyle inflation.

The scoop on lifestyle inflation

Lifestyle inflation (also known as lifestyle creep) is a term for when someone increases their expenses and standard of living to match an increasing income. Or simply put, spending more money when you make more money.

Things that you used to think were luxuries may not seem so out-of-reach anymore, especially when you justify it knowing a higher paycheck’s coming in each month. While enjoying the benefits that your higher income affords can provide some degree of immediate satisfaction, it may prevent you from using it more responsibly for things like saving, building a healthy emergency fund, or investing in long-term wealth.

While you may enjoy the short term thrill of living the high life now, it can make paying down debt, buying a home, or saving for retirement a lot less achievable. Ultimately, lifestyle inflation can make it more difficult to build wealth, the very thing you thought your raise would make possible.

How to avoid lifestyle inflation

Taking the opposite approach to lifestyle inflation can leave you happier and wealthier in the long run. If you can keep your expenses low while your income rises, you’ll be building your overall net worth and helping set yourself up for long-term financial success.

Here are a few tips on how to avoid succumbing to lifestyle inflation.

1. Keep a budget

First things first, if you’re not already keeping a budget, it’s time to start. By creating and sticking to a budget, you’re setting a benchmark for your spending. If you start to spend more in a certain category, your budget will help make it increasingly clear where you should start cutting back.  

We know it’s tempting to adjust your budget right after you get a raise, especially when you’ve had your eye on a number of lifestyle upgrades. Fight that urge, and you’ll help set yourself up for future financial success.

2. Pay your credit cards in full

The tricky thing about a raise is that you don’t get the money all at once. Instead, it comes to you throughout the year in increments on each paycheck. But when you get that raise, it can feel like a big leap forward, especially on paper. Suddenly, you feel like you have extra money to play with, which may tempt you to make purchases on credit cards.

Here’s the trick—don’t. Pay down your credit cards or keep them paid in full if you can. Although big purchases may lure you in while you operate under the assumption that you now have the means to cover them, this can catch up with you over time and prevent you from putting a dent in your debt. 

Keeping your credit card balances low, if not at 0, doesn’t just help to protect you against lifestyle inflation. It also saves you from continuing to pay high interest, which in this case, is money down the drain if you have the means to avoid it. 

3. Wait on big purchases, even for a few days

Right when you get that first paycheck that reflects your raise, you’re probably going to want to celebrate. You should—but within reason!

Before you splurge on any big-ticket items, sit with the idea for a few days. Determine your wants vs. your needs, and consider whether that money could be better spent or saved elsewhere. There are still probably a number of ways you can celebrate your raise without having to splurge. You also don’t want to end up with buyer’s remorse or debt you can’t cover.

4. Lay out your long-term financial goals

As we mentioned, it’s very easy to spend more once you make more. That is, unless you take that extra money that’s coming in and allocate it elsewhere.

Take some time to consider both your short and long term financial goals. Where do you want to be in a year? What about in 5  years, 10 years, or even 30 years? If you know you want to take a big vacation in the coming year, set aside some of your extra earnings for that. Or if you know you want to buy a house in the near future, start saving for that too.

Opening up a savings account can help here, as when you keep your extra money separate from your everyday bank account, you may be less tempted to use it. Need some help reaching your savings goals faster? A high yield Varo Savings Account offers no fees and easy auto-saving tools to help grow your money.

And don’t forget about retirement. Getting a raise is a perfect opportunity to increase your contribution rate in order to set yourself up for success down the road. It can also help avoid feeling the pinch now, especially when it’s taken out of your pre-tax income automatically

While combating lifestyle inflation may involve some restrictions, keep in mind that a higher income can support your financial goals while still allowing for a few luxuries. Like we said before, celebrating your raise as a milestone is important, but it’s also necessary to find the right balance between spending and saving your newfound cash flow.

Unless otherwise noted above, opinions, advice, services, or other information or content expressed or contributed by customers or non-Varo contributors do not necessarily state or reflect those of Varo Bank, N.A. Member FDIC (“Bank”). Bank is not responsible for the accuracy of any content provided by author(s) or contributor(s) other than Varo.

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