Ways to spend and avoid ‘lifestyle inflation’

As you progress in your career and your income grows over time, it can be tempting to increase your spending too. However, “lifestyle inflation”, or “lifestyle creep”, as this is called, can prevent you from reaching your financial goals.

Here are some tips to help keep your spending in check as your paycheck grows:

Know where your money is going

The first step to avoiding lifestyle inflation is to understand exactly where your money is going every month. Break down all your expenses to see if there are areas you can trim back.

Here are some questions to ask yourself:

What percentage of your income goes to needs like housing, transportation, groceries, and utilities? Ideally, this should be under 50%.
What do you spend every month on wants – dining out, entertainment, vacations, etc.? Is this in line with your values?
How much are you saving every month towards goals like an emergency fund, retirement, or your child’s college education? Is this sufficient for your plans?

Getting clarity around your full financial picture allows you to make intentional decisions with any extra funds that may come your way. Our budget tracker can help you start.

Create a budget

Once you understand your spending, create a budget to align with your financial priorities. Automate transfers where possible – for example, have a portion of your paycheck automatically sent to a separate savings account every pay day. When you get a raise, have some of the increase added to the auto-transfer amount.

Build financial buffers

As your income grows, try prioritising financial buffers rather than inflating your lifestyle. Some buffers include:

Emergency fund: Build up at least 3-6 months’ worth of living expenses to cover unexpected crises without going into debt.
Retirement savings: Increase contributions to workplace and personal retirement plans. Not spending these earnings now allows compound growth later.
College savings: If you have kids to support in college someday, start saving now. Every bit you save early, can take pressure off your future self.

Focus on value

There isn’t anything wrong with deciding to use some income gains to enhance your lifestyle – ideally, any spend you make should align with your overall values and goals. Try to focus increases on areas that add value to your life. An example could be deciding to upscale your home kitchen which has been long overdue vs. upgrading your 2-year-old car for a newer model. A good strategy for luxuries is to use only unexpected amounts like bonuses, inheritances or amounts you receive as gifts, not your regular income, but remember to save some of your windfall money first.

Foster open money conversations

Talking about money can make people uncomfortable. But avoiding these conversations can make lifestyle inflation silently take root.

Foster open, non-judgmental financial dialogues, especially when your income or expenses increase. Share your goals, priorities and tradeoffs with your spouse, family and/or close friends so you stay aligned.

If you have kids, try discussing financial changes and decisions as a family. Explain your budgeting decisions and why avoiding inflation in certain areas helps the whole family long term.

Staying grounded

As exciting as earning more can be initially, avoiding lifestyle inflation comes down to staying grounded. Communicating openly and keeping everyone’s needs and priorities front and centre will serve you and your family well on your financial journey.

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