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Manage Lifestyle Inflation

Consider a college graduate just embarking on a career who settles into a comfortable apartment for $750 a month. A couple of years later, their salary has increased, so they find a better apartment for $1,250 a month.

The old apartment was adequate—good condition, great location, nice neighbors—but the new one is located in a more exclusive neighborhood. Despite the fact that the original living arrangement was fine, they traded up to a more expensive apartment—not because they needed to, but because they could.

When a person advances into a more profitable position at work, their monthly expenses typically rise correspondingly. This is a phenomenon known as lifestyle inflation, and it can present a problem because you might still be able to pay your bills, but you are limiting your ability to build wealth.

Why Lifestyle Inflation Happens
People have a strong tendency to spend more if they have more. A couple of factors are at work here.

One is the “keeping-up-with-the-Joneses” mentality. It’s not uncommon for people to feel that they have to match the buying habits of their friends and business associates. If others drive a BMW to the office, you might feel compelled or pressured to buy one as well, even if your old Honda Accord gets the job done just fine.

Likewise, your house on one side of the city may have been your dream home when you moved in, but with so many of your colleagues talking up life on the other side of the city, suddenly you may feel the need for a new address.

Lifestyle inflation creeps into more areas. You can end up spending more money than you need to (or should) on vacations, dining out, entertainment, boats, private school tuition, and clothing, just to keep up with the Joneses.

Consider the Joneses
Keep in mind that the Joneses may be paying off a lot of high-interest debt over a period of decades to maintain their appearance of wealth. Just because they look rich doesn’t mean they are, and that doesn’t mean they are making financially sound decisions.

Another contributing factor to lifestyle inflation is a sense of entitlement. You’ve worked hard for your money, so you feel justified in splurging and treating yourself to better things.

While this is not always a bad thing, rewarding yourself too much for your hard work can be detrimental to your financial health now and in the future.

When Spending More Makes Sense
There may be times when increasing your spending in certain areas makes sense.

You may need to upgrade your wardrobe, for example, in order to be dressed appropriately at work following a recent promotion.

Or, with the birth of a new baby, you may really need to move into a house with an additional bedroom so the grown-ups can get some sleep.

Things Happen
Your situation will change over time—both professionally and personally—and you will likely have to spend more money on things you previously avoided altogether, like a car, or things you could skimp on, like your wardrobe. A certain amount of lifestyle inflation is to be expected as your work and family obligations evolve.

Spending a little extra to improve your quality of life might also make sense, as long as you can afford it.

As you advance in your career, for example, you may not have time to mow the lawn and clean the house. Even though it’s an added expense, it’s reasonable to spend the money and pay someone else to do it, so you can free up some time to spend with family, friends, or doing a hobby you enjoy.

Being able to enjoy a bit of free time helps promote a healthy work-life balance and can make you more productive at work.

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