People will spend money, if they have more money to spend. Consider this, Paul is a graduate. During NYSC he was paid a monthly allowance of N33,000. He took care of his needs; food, clothing, transportation, and accommodation, perhaps. From this sparse sum, he still sets aside a portion for his savings. After POP, he gets a job that pays a monthly salary of N120,000 so he finds a better apartment, upgrades his ward robe from roadside “bend-down select” wears to proper boutique collections.
A few years later, his salary has increased, so he finds again, a “better” apartment for a higher price than what he used to pay. 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, he moved up to a more expensive apartment, an even better wardrobe, a different shopping location – not because he needed to, but because he could.
Lifestyle inflation, also called Personal inflation is when a person increases his/her living cost as a result of an increase in their financial status. This phenomenon might appear normal, and even necessary but it can present a problem which one might not see for what it is – Because you can still afford to pay your bills, right? Well, lifestyle inflation might limit your ability to build wealth.
Why Does It Happen?
The tendency to spend more when we have more money is a key factor in lifestyle inflation. The saying; Big man, big problem should not always be the case as it is possible to tone it down on the newly acquired financial status while you focus on building wealth.
Another reason for lifestyle inflation is “keeping-up-with-the-joneses”. People easily get drawn into a lifestyle competition with that one person or family who seem to have the perfect life, with everything they need to be happy. But keep in mind that the Joneses are typically servicing a lot of debt over a period of decades to maintain their wealthy appearance. Because they look rich doesn’t mean they are and neither does it guarantee that they are making sound financial decisions.
Entitlement is also one of the culprits that have been implicated in lifestyle inflation-You’ve worked hard for your money so you feel justified in indulging yourself. While a little self-indulging might not be bad, rewarding yourself too much for your hard work can become addictive. You get drawn into the habit and lose sight of your financial goals.
When Lifestyle Inflation 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. Your situation will change over time – both career-wise and personal life – and you will likely have to spend more money on things you previously avoided altogether (like a car) or things you could manage without (new clothes). A certain amount of lifestyle inflation is to be expected as your work and family obligations changes over time.
Spending a little extra to improve your quality of life might also make sense – as long as you can afford it. While some level of lifestyle inflation may be unavoidable, remember that every spending decision you make today affects your financial situation tomorrow.
Controlling Lifestyle Inflation
You need to cut down on unnecessary expenses and acquisitions that indirectly make your income into a debt-servicing tool. Acquisitions such as a car for example, when you have only one stream of income (perhaps a monthly salary) is a bad idea. Inflation only hits you more when you spend, thus it is important to relent on your spending habits as a way of lowering your exposure to inflation.
It is possible (and quite easy too) to still live pay check to pay check even with a high monthly income, just like you did when you were earning little. That’s because the increased spending that results from lifestyle inflation can quickly become a habit; The more you earn, the more you spend. You buy more things than you need just to maintain your new (inflated) standard of living.