Avoiding Lifestyle Inflation

When my wife and I first got married, we lived on a meager income. We lived in a run-down two bedroom apartment and ate Hamburger Helper more than I’d care to admit. We managed to get by and live a happy life even though we didn’t have cable, rarely ate out, and shared a cell phone.

But over the years our income rose and our standard of living along with it. We now own a home, have newer cars, we each have our own cell phone and we have cable TV with premium channels. However, when I reflect on all the things we have, I’m not sure that we are any happier than we were when we were poorer. But everything that we have accumulated in the past eight years just seemed normal because everyone else had it too.

It is perfectly normal for your expenses to increase with our income over time. Some increases, like those due to economic inflation, we cannot avoid. However, if you really want to build your wealth, you will have to keep your lifestyle inflation in check and understand that keeping up with the Jones’ may make you look rich, but can actually make your poorer.

To curb your lifestyle inflation, first take an inventory of your monthly spending. How much money is spent on absolute necessities? How much is spent on added conveniences? For example, we need to have a phone to communicate with each other. But do you need to have the latest greatest phone with all the bells, whistles and expensive data plans? A basic cell phone plan starts at around $50 per month. However, it’s not uncommon to see cell phone bills over $200 per month with all the extras. You could do a lot with an extra $150 each month. You could pay off debt or invest for retirement. Both of those options will help you to build your wealth over time.

Now you don’t have to cut out all the fun stuff in your life, but you should seek a balance and moderation. I really like having the internet on my phone and HBO on my TV, but I’d probably be happier if I had my car paid off and more money to save toward a tropical vacation. Recognize the difference between wants and needs and make your choices wisely because you may have to live with them for a long time.

Another way to curb lifestyle inflation is to fool yourself into thinking that you don’t have much money to spend. Pay yourself first by contributing to your 401(k) or IRA and have it taken out automatically. You will be building your wealth while limiting the amount of money you have to spend frivolously. Also, use cash to help you limit spending. It’s harder to overspend when using cash and it makes you think twice before spending because you only have a limited amount on hand.

Lastly, remember that life is about the experiences that you have and the people that share them with you. Everything else is just stuff. Keeping things in perspective is the best way to keep an objective view on your finances.