Lifestyle Inflation is a silent killer of wealth. Thinking differently about Lifestyle Inflation may help in dealing with it.
What is Lifestyle Inflation?
Lifestyle inflation (lifestyle creep) happens when people spend more and more money to achieve a higher standard of living.
Lifestyle inflation can occur in any area – from everyday expenses like a cup of coffee to big purchases like buying a car.
When Jack starts at his first job – he may buy a used car as his first car. After a few years, he gets a promotion. So, he upgrades to a brand new car. A few years go by, and the new car is replaced with a newer SUV. A few years later comes a luxury car. After that, a bigger luxury car, and so on…
This scenario plays out not just with the car but with almost every aspect of Jack’s life. He is continuously upgrading to the newest / fanciest thing. This is lifestyle inflation in action.
Lifestyle inflation is so common that we hardly notice it – which is why it is so harmful.
Most lifestyle upgrades seem small or one-off. However, it is not the upgrades themselves but the mindset of continuously upgrading everything that can be the problem. Small upgrades in multiple areas can add up to big expenses!
Lifestyle inflation is a silent killer of wealth.
Why Lifestyle Inflation is harmful
Lifestyle creep guarantees that people will never be happy – after all, there is no limit to how many fancy cars Jack can buy.
The other impact of lifestyle inflation is that Jack will work all his life. He will be dependent on his job and will never achieve financial freedom.
As shown in the picture below, Jack is making more money as he gets promoted / gets raises. However, his expenses also increase due to lifestyle inflation. The result is that Saving (Income minus Expense) is not growing. This means Jack will always be dependent on his income (job) to meet his expenses.
Not just that, given how small his savings are, he will never accumulate any real wealth.
In the above example, at least Jack is saving something. In many cases, people spend more than their income (the red line goes above the blue line)! So instead of saving money, they borrow money and end up in debt.
Being in debt is rarely a good idea. But being in debt just to keep up with the Joneses is even worse.
The other reason lifestyle inflation is terrible is that there is no logical end to it. No matter how big a house you have, you can always buy a bigger house. So theoretically, you can keep upgrading all your life and still not be done.
Mahatma Gandhi used to say – there is enough to meet everyone’s needs but not enough to meet everyone’s greed!
Lifestyle inflation is like a hole in a tire.
You can pump in air, but the tire will not get full until the hole is plugged.
Maximize for happiness; not for status
One way to avoid lifestyle creep is to think about what is essential in life. Most people agree that the purpose of life is either to maximize Happiness or to maximize Utility (being helpful to others).
Let us say Jack values Happiness. Lifestyle inflation happens when he confuses Happiness with Status.
A house can be a status symbol – the bigger the house, the better. Owning a 4 BHK house (4 Bedroom Hall Kitchen) is a more prominent status symbol than owning a 2 BHK. However, does a bigger house also lead to more happiness?
Is bigger always better?
When Jack and Jill upgrade from a Studio Apartment to a 2 BHK, they will have more room for themselves. They will have more space to host friends and relatives. This can bring about a significant increase in happiness and utility.
But, does moving from 2 BHK to 4 BHK also increase happiness? Maybe it does, but not by the same amount as before. On the other hand, it does increase the cost a lot. So in effect, they are not getting the same amount of value from the increased cost.
And upgrading to a 6 BHK increases the cost but definitely does not increase happiness. In fact, it ends up decreasing happiness!
Now they have to spend more time cleaning up the big house. If they do not have the time or energy, they have to hire someone to do it, further adding to the cost. And this is not even considering all the other expenses that will go up – property taxes, house insurance, more furniture needed for the extra rooms, maintenance cost, heating / cooling costs, etc.
So, bigger is not always better. Luckily, Jill is a reader of this blog and convinces Jack to stick to the 2 BHK house rather than upgrading to a 4 BHK or a 6 BHK!
Related Article: Why we are Bad at Financial Planning
Ways to deal with Lifestyle Inflation
As seen above, the way to deal with lifestyle creep is to maximize Happiness or Utility and not Status. It helps if your friends / relatives also share this kind of thinking. Not all of my friends are interested in Financial Independence. But most of them have a simple lifestyle, which helps us not get sucked into lifestyle inflation.
The other important thing is to realize when lifestyle inflation is actually happening. We have been conditioned by society / advertisements / social media / etc. to always keep on buying / upgrading. In this day and age, it is not easy to notice that lifestyle inflation is happening.
An excellent way to determine when lifestyle inflation is happening is to think in terms of needs and wants.
Needs are imposed by nature.
Wants are sold by society.
Mokokoma MokhoNoaNa
I never equated success with material things. Being successful meant having the freedom to do what I wanted, not owning a mansion or a luxury car. This way of thinking helped me tackle the ever-present temptation of lifestyle inflation.
Lastly, I took my fight against lifestyle inflation to the extreme. During my FI journey, I realized that saving is the most important thing for financial independence. So, instead of lifestyle inflation, I focused on lifestyle deflation by actively reducing my spending.
In conclusion
Lifestyle inflation is the single biggest hurdle for achieving real wealth. What makes it worse is that most of the time, it is invisible. Being mindful of when lifestyle inflation is happening, maximizing Happiness / Utility (instead of Status), and developing a frugal attitude can help.
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