In theory, when your paycheck gets bigger, so should your ability to build your nest egg, pay off debt, and work toward some big-picture financial goals.
But rather than go straight to savings, that extra money can often end up getting funneled toward a few more dinners out, another new (yet unnecessary) gadget or a fancier set of wheels.
After all, don’t you deserve to reward yourself with an SUV after years of driving a compact clunker?
The tendency to spend more as you earn more is known as lifestyle inflation—and it can affect you whether you make five figures or seven.
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Lifestyle inflation is exactly what Elaine Harper*, 30, a massage therapist and nutrition coach, has been worried about as her income has grown recently.
Elaine; her husband, Scott; and their two young sons moved to Portland, Ore., from Santa Barbara, Calif., last year in part to lower their cost of living.
Scott, a social worker, took a pay cut to make the move, and Elaine needed time to ramp up her business in Portland, so their take-home pay was initially about $3,000 per month.
But Elaine’s business has been on the uptick, and in the past three months or so, their take-home pay has grown to between $4,000 and $5,000 per month.
“[Since] I recently started generating more consistent income, I’ve redone our budget—and I can definitely see the expenses creep,” Elaine says. “I’d really love to nip that in the bud.”
To help her do just that, we asked Colin Drake, CFP®, head of Drake Wealth Management in Sausalito, Calif., to take a look at the family’s expenses and spending habits—and weigh in on how they can help stop lifestyle inflation in its tracks.
What Elaine Thinks of Her Lifestyle Inflation Problem
“Since moving to Portland, we’ve gotten more bang for our buck. For instance, we pay $1,455 a month to rent a nice home downtown, as opposed to the $1,650 we were paying to rent a condo with a concrete slab for a yard in Santa Barbara.
But as I’ve taken on new clients and grown my business here, that extra $1,000 or so that’s been coming in has been quickly used up.
Some of it is out of necessity.
Before my work picked up, I needed a babysitter six to 10 hours per week. It’s more like 12 to 15 hours now—and sometimes more during weeks that I crave time to myself. This has bumped our child care costs to $960 a month at times—much higher than the $330 I was averaging just three months ago.
But other expenses are definitely a result of lifestyle creep.
Food is one of the first things I spend more on whenever I feel we have some wiggle room. So we’ve been going outside the grocery list more often, eating out more when we’re tired or rushed, and I haven’t planned ahead with meals well enough.
“The only other saving we do is transfer about $150 a month into savings—but that always seems to get transferred back into checking to cover some unexpected cost.”
I also haven’t been proud that our ‘extraneous shopping’ has gone up.
We’re usually good about reining in those costs. We don’t, for instance, stock up on toys for the kids or go on shopping sprees.
I’d budgeted $150 for miscellaneous shopping, but realized we were actually averaging $300—probably because we’ve been more willing these days to throw an extra magazine here, a trinket there, or a clothing item into the shopping cart.
All of that adds up, and I don’t want it to stop us from working toward some of our goals. Eventually, we want to buy our first home in Portland, and the ones in the neighborhoods we like are between $400,000 and $450,000.
Outside of the 5% 401(k) contributions Scott just started making, the only other saving we do is transfer about $150 a month into a savings account—but that always seems to get transferred back into checking to cover some unexpected cost.
On top of that, we have about $9,000 of credit card debt we’ve accrued since the move. Right now, we pay from $300 to $700 a month on our cards, but it should be more like $1,500 to get that debt paid off by year’s end, when our 0% APR offer expires.
There is one bright spot: We’re inheriting investment accounts that will be worth about $220,000, which we’re thinking of using toward a home down payment.”
What the CFP® Says About Elaine’s Lifestyle Inflation
The most efficient way to tackle their spending creep won’t come from fretting over the small purchases or depriving themselves of all the fun in their lives, Drake says.
“You don’t want the kind of life where you’re at the checkout going, ‘Should I buy People magazine or not?’” he says, adding that Elaine can rest easy about her child care costs, which are necessary to growing her business—and saving her sanity.
Rather, he suggests focusing on lowering more significant cost categories that compose about 10% or more of their spending.
“People end up putting too much stress and energy into the little stuff that doesn’t make an impact,” Drake explains. Instead, he says, it makes more sense to ask yourself what your Number 1 expense is, then your Number 2 expense, etc., and focus on the bigger costs first.
Finding a less expensive place to rent, for instance, could make a big impact, considering housing makes up about 28% of their total costs. And they don’t have to consider it a permanent move, says Drake—just something to consider doing until their income climbs.
In fact, Drake suggests they hold off on buying a home until their salaries rise, because even though they have enough to cover a down payment through the inheritance, the type of house they want could lead to further inflated lifestyle costs.
“The bottom line is we’re looking for two things when we impulse buy: the temporary cessation from wanting, and trying to feel happy.”
Drake estimates that their mortgage payment would be around $1,900 a month for a home in the price range they want, not including the several thousand they’d likely pay in property taxes and maintenance costs.
Instead, he encourages them to use their inheritance to start an emergency fund of somewhere between $30,000 and $70,000, which could cover their expenses for six months to a year should they lose income. Any leftover money can then be used to pay down their credit card debt and to start saving for a down payment. (And, of course, it'd be wise for them to consult an accountant to help them figure out how liquidating their investments would affect their taxes.)
When it comes to their ballooning food costs, says Drake, a little preplanning could go a long way.
For example, they can pick three of their family’s favorite meals, sort them by prep time, and prioritize their grocery list so they always have those ingredients on hand. “Then they’re less tempted to eat out after a long day,” Drake says.
As for those pesky “extraneous shopping” impulse buys, Drake says Elaine should ask herself four questions before pulling out her wallet: What is the feeling I believe I will experience after I’ve made this purchase? How long is that feeling likely to last? Does it seem worth it? And is there a free way to get that same feeling?
“The bottom line is that we’re typically looking for two things [when we impulse buy]: the temporary cessation from wanting, and a feeling of happiness,” he explains. “By being aware of how effective these purchases are in actually bringing us happiness, we can then be more aware of when to skip a purchase.”
What Elaine Thinks of the CFP’s Advice
“This advice is amazing! The idea of sorting expenses from largest to smallest and then focusing on reducing the larger ones first makes sense to me.
Plus, it’s nice to hear from a financial planner that my time away from home for work and self-care is essential—even if it means needing more child care.
We don’t make time for date nights as it is, so maybe some of our convenience takeout runs can be used to help pay for a date night!
I also hadn’t thought about the extra expenses that come with purchasing a home, such as maintenance costs. So it’s good to know we need to take those into consideration when we think about buying a home.
Another thing that jumped out at me?
The feeling associated with my shopping expenses. That really spoke to our lifestyle inflation tendencies—so I’ll be reading that over and over!”
*Names have been changed.
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.