Lifestyle inflation

Lifestyle inflation (aka lifestyle creep) is where your spending habits grow to match, or exceed, a salary increase. This can happen when your income goes up from a windfall or a promotion at work. There’s nothing wrong with enjoying your money, but how can you make sure you’re prioritising your long-term goals?

Lifestyle inflation is about earning more and spending more. If you’re not careful, it’s easy to get into a cycle where your outgoings only ever just about cover your income. But with planning, and a change to your spending habits, a salary increase can boost your savings and investments, and help you achieve financial wellbeing.

Understanding lifestyle creep

Before tackling lifestyle creep it’s useful to understand why it happens. In some ways, it makes sense: you’ve worked hard for a promotion, so why shouldn’t you treat yourself? But it’s important to try to find some sort of balance. If you spend all of your salary increase on things you don’t need, are you actually any better off?

Lifestyle creep isn’t just about the temptation that comes with having more money. It can also come from a sense of entitlement, that you deserve more things. Or it can stem from a sense of FOMO when you try to keep up with a new social circle that a wealth increase can bring with it. 

Lifestyle inflation isn’t always a bad thing. We all hope that our situations will get more comfortable over time and that we’ll be able to afford things that previously felt out of reach. 

It’s also possible for your outgoings to increase over time. Life changes like having children or moving in with your partner often lead us to want a bigger house or new car. A better job might come with a more costly commute, or keep you away from home more, so you need a cleaner or more childcare. 

Tackling lifestyle inflation isn’t about stopping enjoyment. It’s about balancing your finances so that you can truly improve your circumstances. 

4 spending habits to help you manage a raise

Lifestyle inflation can keep us living paycheque to paycheque, regardless of an increase in our wealth. It’s easy to get in the habit of reaching for happiness by buying more things. These tips and tricks can help you to use a salary increase to work towards bigger life goals and boost your overall financial wellbeing.

1. Post-raise budgeting

Using a budget is a great way to find a harmonious balance between your income and your monthly outgoings. There are lots of different types of budgeting rules, but because they often break your income into percentage chunks, they will still balance your finances regardless of how much you earn. 

Take the 70/20/10 budget: this breaks your income into 70% essential expenses (like rent and bills), 20% for non-essential (luxuries and entertainment), and leaves 10% for your financial goals. By sticking to this rule, your budget will continue to work even if your income goes up. 

If you find that you’re spending less than 70% of your income on your essential expenses, you could up the size of the chunk that you put into your financial goals. Or you could move to a more goal-focused budget, like the 50/20/30 rule, which would both increase your luxury spend and double your goal contributions. 

Another great tip is to get an accurate view of any income increase. Calculate what it looks like after tax, for example, and which of your outgoings might increase alongside. This can give you a realistic idea of what your new income actually looks like and could keep your spending in check.

2. Prioritise debt repayment

If you come into money, the first thought that might crop up is how to spend it. But paying off your debts might actually make your increased budget feel even bigger in the long term. Even if you plan to squirrel your cash away for a life goal, debt repayment can often be the best first step. 

This is because the interest that you pay on debts will normally be far higher than the interest that you earn on your savings. So, by clearing your debts, you can boost your saving and spending power by avoiding expensive repayment plans. 

3. Build an emergency fund

Once your debts are cleared, a great plan for your money is an emergency fund. An emergency fund is a savings pot that can cover between three to six months’ worth of your income. Think of yours as a safety net for the surprises that life can throw at you.

Whether it is for your emergency fund, or you’re saving towards a big purchase like a house deposit, saving is a great way to build a foundation for your financial resilience. Remember to set up Direct Debits to automate your savings payments on payday, so that you always pay yourself first.

You can also use your savings to grow your credit score. A higher credit score could mean that you are more likely to be accepted for loans and credit cards, and can get you the best deals on interest rates. With Loqbox, you can work towards your savings goal while giving your credit score a boost. 

Improvements to your credit score are not guaranteed. 

4. Enrich your spending habits

Having more money doesn’t necessarily mean that you need to buy more stuff. Instead, invest in yourself. Many people get greater happiness from buying experiences, rather than things. Holidays, trips to visit family and friends, skydiving, and learning new skills might enrich your life more than a pair of shoes, a new car or a bigger TV.

Practising mindful spending can bring lasting happiness rather than temporary hits of joy that can come from retail therapy. When you get the spending bug, try to stop, take a breath, and work out if you really need these things, or if they’re just filling a hole in some other part of your brain.

In summary

If you’ve recently come into more money, from a promotion or an inheritance payout, try to avoid the trap of lifestyle inflation and instead use the money to better your situation in a deeper way. Focus on your long-term goals and pay yourself first. And when you do spend, buy experiences over things.

Don’t be ashamed to upgrade your lifestyle when your income grows. You’ve worked hard for the money so you deserve to benefit from it. But allow your finances to get a sure footing, with an emergency fund and core savings, before taking any unnecessary steps into lifestyle inflation.