In the personal finance world, you hear about lifestyle inflation all the time. You should figure that if you were making it on your old salary, most if not all of a raise should go to savings/investments.

Instead, those who are victims of lifestyle inflation find their “needs” creeping up right along with their paycheck. You might think you’re not prone to this problem – I was sure I wasn’t.

Then, on a whim, I looked up my payroll history. From the first year I started my job to now (nearly four years), my twice-monthly paycheck has gone up about $350. That’s $700 per month!

To be fair, that’s pre-tax. But even after taxes, and accounting for an increased 401(k) contribution and rises in health insurance and other deductions, my take-home pay has risen just over $450 per month. Since inflation has been mostly non-existent during that time, I should have been able to keep my spending relatively flat, and instead increase my savings by an equivalent amount. Needless to say, that didn’t quite happen.

Where Did it Go?

As part of the analysis of my 2010 spending, I tried to figure out where my expenses had increased. Some areas were unavoidable – I live in a high rent area, and rent increases at a rate equal to or greater than my raises.

But in other areas, I definitely am guilty of spending more because I had more. I’d say I allow myself to spend more on both food and clothing than I did 3 years ago. As I earn more vacation days at work and family members/friends experience milestones, I have traveled home more in the last 1-2 years than I did when I first started working.

In addition, as I have gotten older I have had friends from college get married in different parts of the country – three weddings in the last year and at least two in 2011 all come with costs that I didn’t incur in years prior to 2010.

Dialing Back the Impact

While I have not always been great about saving amounts equal to increases in my paycheck, I have been better about saving any “extra” funds I receive, including side income, tax refunds, and bonuses.

So my actual expenses may not have gone up too much, and I am at least reducing the impacts of any lifestyle inflation that has taken place. In addition, I’ve tried to cut costs in some categories (such as by moving to a cheaper apartment that included utilities) to make up for increases in other categories (such as transportation, due to major public transportation fare increases). I also remind myself that some amount of additional spending is okay as long as I am still meeting both my short- and long-term savings goals.

Going Forward

I’ll be up for another raise this summer and plan to be quite aware of what I do with those funds. As I have with every raise, I’ll increase my retirement contributions – while my 401(k) contribution will stay the same as a percentage of my check, the dollar amount will go up. I’ll also increase the dollar amount I contribute to my Roth IRA. In addition, I plan to up my cash savings to help me prepare for some potential big outlays in the coming months and years.

Even if you haven’t gotten a raise recently and don’t expect one anytime soon, you might find that you have been a victim of lifestyle inflation. Your paycheck likely went up in 2009 with the Making Work Pay credit, and will increase again with the new payroll tax cut. If you can’t account for the increase, you likely just absorbed it into your every day spending.

The next time you see an increase in your paycheck, figure out exactly what the take-home dollar amount is. Then do your best to assign every dollar to a purpose – and try to assign at least 75% of the total raise to debt repayment, savings or retirement contributions. It’s ok to use the other 25% for increased expenses or just a little mad money – just don’t go overboard!

Are you prone to lifestyle inflation? What are some ways you’ll try to combat it in 2011?






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Comments to Are You a Victim of Lifestyle Inflation?

  1. People who upgraded from a vanilla phone to an iphone succumbed to this inflation!

    I did the next best thing and bought a touch and kept my crappy plan.

    MoneyCone

    • lol I’m in that group of people… but my Droid phone is so awesome that I’m unable to switch back to a regular non-smart phone to save on monthly bills. The same with high-def TV shows.

      Adam @ ThisIsWhyImBroke

  2. Over the years, I saw our lifestyle increase until we downsized 14 years ago. We max out my 403B, Roth Ira ans IRAs, however we still travel every year. Travel is our only splurge, but I use miles for airlines and I am pretty good at getting good deals on hotels.

    krantcents

  3. I’m a victim of lifestyle inflation. Before my promotion, we were making ends meet just fine. A small struggle but a little better than living paycheck to paycheck. With a promotion and raise, yeah, we were able to save some more, but seems like our spending increased too. Now that our income has been cut in half, we have to make sure we’re being as frugal as possible and implement lifestyle deflation. That’s coming with moving to a cheaper place with utilities included, looking for a fuel efficient car, and cooking instead of eating out.

    20 and Engaged

  4. Lifestyle inflation is a challenge, regardless of where you start and where you end up. It’s as consistent as any physical principle, like gravity, and I’ve seen it happen to people at every level of income growth.

    Nice job outlining some actions to curb it and being the role model with your own situation.

    I hate being the guy that points out flaws in someone’s post, but when I read your statement that ‘inflation was mostly non-existent over the past 4 years’ I just about jumped out of my seat. Hopefully some of the data below helps you give yourself a little more slack on the disappearance of your increased income over the past few years.

    To get an idea of what inflation has been like over the past few years, just think about the difference in price over that time frame for the following items:

    1. Gas: In 2006, the national average price was in the $2.25 range. It spiked in 2008 at $4.00, averaging $3.25 for the year and was $2.73 for 2010. That’s 5% average annual inflation from ’06 to ’10.

    2. Energy Costs: The Fed’s stated that energy rose 7.7% in 2010 alone, and I bet that number is understated for high cost states like California.

    3. Travel Expenses: Airfare rose 9.5% over just the past two years.

    Health care and food expenses also went up during that time frame, making the core items of our life much more expensive today than they were just 4 years ago.

    That’s why a person’s income needs to go up by more than inflation (done with a COLA typically) if they’re going to get ahead.

    Hope this info helps more than being a downer.

    Josh | YourFinancialRevolution.com


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