So What Is Lifestyle Inflation?

save money Mar 23, 2022

I wrote last month about the current inflation problem we have here in the UK, in the US and in pretty much every other country in the world.

Inflation is simply a way to describe rising prices. If a loaf of bread cost £1 last year and now costs £1.05 – we have 5% inflation – the cost has gone up by 5%.

If an iPhone cost £1,000 last year and now costs £1,100, we have 10% inflation etc.

The inflation we are experiencing at the moment is really dangerous. This is inflation impacting on the cost of basic necessities like food, utilities and fuel for our cars. This inflation is impacting on pretty much everyone right now. Even people who enjoy a comfortable standard of living are starting to struggle and for those who were finding it hard making ends meet before things are getting even tougher. 

In times like these, it is important to really focus on your own expenses and ensure that you are still in a positive cashflow position (that is, more money coming in than going out). I wrote last month about some strategies to improve your current situation and combat the current bout of inflation.

The inflation we are talking about above is the general cost of living rising, BUT, there is another kind of inflation to aware of. This kind of inflation can potentially be even more dangerous and damaging than general inflation if you let it. The inflation we are talking about here is Lifestyle Inflation.

I realised the other day that although I mention Lifestyle Inflation a lot, I have not yet written a post about it so I though what better time to be aware of Lifestyle Inflation than now.


So What Is Lifestyle Inflation?

Lifestyle Inflation is essentially when we start spending more on our lifestyle. This is not inflation caused by the cost of things increasing, this is inflation caused by the choices we make about what and how we spend.

For example, very often when people get a pay rise at work, the increase in pay often gets absorbed into their standard spending within a few months. We humans are very good at adapting quickly to our new circumstances, so we adjust our lifestyle to take into account that nice pay rise we just received. 

The problem is that money is very easy to spend and generally quite difficult to earn. As a result, we sometimes over-compensate and end up spending money as fast as (or even faster than) we are earning it. This can be especially true when we have just received a pay rise or a bonus. We worked hard, so we deserve that nice treat right!

Well, yes, you do – but it is important not to get carried away. A pay rise or a bonus is an excellent opportunity to begin saving and investing for your future. You have just received an increase in income (or a lump sum in the case of a bonus) that you didn’t have before. You have probably been managing just about fine without that pay rise up until now, so now that you have it, you have an excellent opportunity to begin making some regular savings.

Now, before you accuse me of being a wet blanket, I do think you should let yourself have some fun. This is why I quite like the spend half / save half approach. Let’s imagine you have been earning £1,000 per month up until now and managing just about fine. You go and see your boss and you are awarded a 10% pay rise – nice job. So now, you are earning £1,100 per month.

You could just take that £100 extra each month and find a way to spend it – start shopping at a more expensive supermarket or go and eat out a couple more times each month for example. Now that is all well and good, but it does nothing for your future.


Spend Half / Save Half 

With the spend half / save half approach, you would take £50 of that £100 pay rise and add it to your regular monthly savings or investment contributions. The remaining £50 you add to your spending budget and you can feel good about spending it! You worked hard for that pay rise after all.

The spend half / save half strategy still gives you a reward for your hard work today, but it also makes sure that you are putting something aside for tomorrow as well. What’s not to like.

If you keep repeating this process every time you get a raise, then over time you will begin to build up a significant monthly savings contribution. The best part about this strategy is that you increase your savings contributions out of pay rises, so there is not quite the same sense of sacrifice as there can be where you have to find a way to begin making savings out of your existing budget. When you get a pay rise, you didn’t have the money before and so you are kind of putting the money into savings before you even had it. 

Now, don’t get me wrong, none of this takes away from the current cost of living crisis going on – many people are luck to be able to save anything at the moment and pay rises may not currently be keeping up with the cost of living. With all of this said, don’t forget about lifestyle inflation – it can sneak up on you when you least expect it.

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