People spend money when they have it. And certain people spend more money when they have more. Consider a college graduate with a new career who rents a comfortable apartment for $1,100 a month. They may look for a better apartment for $1,900 per month when their salary increases four years later.
The old apartment was adequate (good condition, decent location, nice neighbors), but the new one is in a building with more amenities and located in a cooler, hipper neighborhood. Even with a suitable living arrangement in the original apartment, they traded up to a more expensive one—not out of need, but because they could.
When a person advances into a better-paying position at work, their monthly expenses typically follow suit. This is commonly referred to as lifestyle inflation. If this happens to you, it can become a problem because you may still be able to pay your bills, but your ability to turn your higher salary into a way to build wealth becomes limited.
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Lifestyle inflation occurs when your monthly expenses increase as you earn more money.
Spending more money even though you earn more can become a problem because it limits your ability to build wealth.
People often spend more money to keep up with the spending habits of those around them and when they feel entitled to do so.
Spending more money may make sense when your personal and professional situations change.
You can avoid the pitfalls associated with lifestyle inflation by knowing when to save/spend and by recognizing (and separating) your needs and wants.
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One of the reasons why people spend more money when they have more available is the good old keeping-up-with-the-Joneses mentality. It’s not uncommon for people to feel they have to match the spending habits of their friends and colleagues:
If others drive a BMW, you may feel as though you need to buy a better car as well, even if your old set of wheels gets you from Point A to Point B just fine.
Your house on one side of the city may have been your dream home when you moved in, but with so many of your associates living in other neighborhoods, you may suddenly feel the need to move.
You’ve always envied other people’s clothes, furnishings, vacations, patronage of fine restaurants and cultural events—and now you have the means to do the same.
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 the better things in life. While this is totally understandable, rewarding yourself too much for your hard work can be detrimental to your financial health now and in the future.
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When Spending More Makes Sense
Your situation will change over time—both professionally and personally. This means 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. You can expect a certain amount of lifestyle inflation as your work and family obligations evolve.
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So, there may be times when increasing your spending in certain areas makes sense. For instance, if a recent promotion at work means longer hours or more travel, you naturally may need to hire someone to do housekeeping or chores. Or you may need to move into a bigger home to accommodate your growing family.
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Spending a little extra to improve your quality of life may also make sense, as long as you can afford it. You may not have time to mow the lawn and clean the house as you advance in your career. Even though it’s an added expense, spending more money and paying someone else to do it may make sense, so you can free up some time to spend with family and friends, or do 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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