Lifestyle Inflation Illustrated

Do you know what lifestyle inflation is? Remember when you got a raise and decided that you could now afford a lease on a new car, instead of driving around your old junker? That is lifestyle inflation. Remember when you finally paid off that car loan and suddenly had extra money in your pocket each month, which you promptly spent going out more often with friends? That is lifestyle inflation.

Lifestyle inflation is the easiest trap to fall into. It is also an extremely dangerous trap. If you fall prey to lifestyle inflation, you’ll never get ahead. You think you’ll be able to save more to reach your goals with each raise or debt payoff, but in reality your lifestyle just grows to fit into your new available income. You likely don’t even feel happier with your life and all your new stuff because you hardly realize that your spending has increased and that your lifestyle has inflated. Spending more becomes the new, subconscious normal.

How I fell prey to the lifestyle inflation beast

You might think that someone like me, who clearly spends a lot of time thinking about money, would be immune to lifestyle inflation. Well, unfortunately for both of us, you’d be wrong. I’ve always suspected that my expenses are going up over time, however I’ve generally been able to reach my savings goals so I haven’t dug into the numbers too much. Recently, I decided that it was time to see how bad the lifestyle inflation has gotten. Let me warn you, it isn’t pretty.

When I first graduated from college, I lived with my parents for a while. As soon as I moved into an apartment, I quickly became aware of how far my meagre salary needed to stretch. So I lived frugally, and I was fine with that. I watched where my money went very carefully, making sure to stay within my budget categories each and every month. At the time, I was saving for a down payment. I am certain that having a concrete, immediate savings goal in mind helped me stick to my budget.

Fast forward a few years and I bought that condo I was saving for. As soon as that happened, I no longer had a huge, imminent savings goal. My savings goals became further off – a new car in a few years, a house somewhere down the line, college for my hypothetical future children, retirement. I still saved (although clearly not as much as I could have), but I also let my lifestyle grow just a little bit at a time. I started eating out more often, buying more expensive items at the grocery store, buying more clothes, and travelling. Sometimes I would recognize that I was spending more than I really wanted to be, and I would rein it in for a while. At some point I would always revert back, though, and the inflation continued.

What do the numbers tell me?

Numbers don’t lie, so here they are in all their glory. I have reliable data for FY 2012 – 2015 (aka July 2011 – June 2015). The graph below shows how the four budget categories I tracked during these years changed over time.

As you can see, it’s not a pretty picture (although it is on a rather perfect, even upward trajectory). My overall budget has increased by 86% over a four year period. That’s more than 20% per year, on average. Ouch.

The good, the bad, the ugly

Digging in further, it is apparent that some of these categories aren’t in bad shape. The “home” category (which included rent when I paid rent and now includes my mortgage, condo fees, etc., net of rent from BF) actually decreased when I purchased my condo. It is now gradually increasing due to a variety of factors, including a recent refinancing which slightly increased my monthly payment and inflation which is causing taxes, insurance, etc. to rise a little each year. But I’m not too worried about this. The same goes for utilities, which have somehow actually decreased over time.

Two areas are cause for concern. The “food/drink” category has increased 84% over four years. The bar graph doesn’t look too bad because this change isn’t a huge dollar change, but on a percentage basis it is definitely concerning.

Similarly, the “other” category is a big problem. It has increased by 64% over four years. This isn’t surprising, as this is where all the slush goes. Clothes, travel, personal care, essentially any expense that doesn’t cleanly fall under another budget category goes into “other.” And, as I explained in my post about how I budget, this is the way I like it. Having flexibility in the “other” category to spend my money how I wish amongst all of my many wants is freeing. But I think I’ve given myself a bit too much freedom.

Next steps

This exercise has given me a lot of information with which to move forward. I plan to dig into the spending that took place within the “other” category to see where my money is really going. I suspect clothing and travel are problem areas, but I’ll have to review the numbers to find out for sure.

I have also realized from this exercise that there is clearly a lot of fluff in my spending. Somehow, four years ago, I was living a perfectly happy life while spending almost half as much money. In order to reach my 46% net worth increase goal this year, I’m going to have to make some cuts to my spending. Let’s hope that the lifestyle inflation beast can be tamed!

Have you noticed lifestyle inflation? Where do you notice it most – food, clothing, travel, etc.?

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