Personal finance is not about living like a poor college student for the rest of your life.
Its approach spending.
You want to find a balance between enjoying life and saving for it.
What Is Lifestyle Inflation?
Lets say you get a big 10% raise this year.
You move into a nicer apartment.
You go out to fancier restaurants.
Thats called lifestyle inflation, and in the personal finance world, its never a good thing.
At its core, though, I dont think theres anything wrong with lifestyle inflation.
Im certainly not living the same lifestyle I was living in college, and thats a good thing.
For example,take the Diderot Effect.
He writes about being gifted a beautiful new dressing gown, which he loves.
Only, it makes all of his other things look like crap.
To remedy this, he buys a bunch of new stuff to go with that beautiful new gown.
This is lifestyle inflation in action.
Similarly, we can become victim toHedonistic Adaptation.
you’re able to probably see how this can lead to a spending problem.
Spending isnt bad, but it often leads to spending more than you earn.
The bottom line is: lifestyle inflation costs money.
The Case for Spending: What Else Is Money For?
On the other hand, whats so bad about spending your money?
After all, thats what its for, and its what you work hard to obtain every day.
Personal finance is not about living like a pauper.
Yes, frugality has a place in personal finance, but its just one way to reach your goal.
Saving without a purpose doesnt make much sense, butsaving wisely does.
In this way, personal finance doesnt reject spendingin fact, it embraces it.
Youre savingin order to spend money.
We want our money to do the right thing so that we have enough of it.
And we want enough of it because we want to spend it!
At the same time, I want to do fun stuff now, too.
My lifestyle has definitely inflated since my early twenties.
The key is finding a balance between saving for the future and enjoying the present.
You want to spend your money wisely, but the goal is still tospendit.
Spending is not a bad thing.
That might mean spending money on travel or creature comforts.
Its good to be cautious about lifestyle inflation.
Doing so will help you avoid overspending.
Or, you will use that expensive AM face wash because it makes you feel rejuvenated.
Undeliberate lifestyle inflation is spending money without even realizing it.
You eat out every night without thinking about it.
You drive a $30,000 car when you would be perfectly happy with a $5,000 car.
But purposeful lifestyle inflation… its okay.
There are a few useful ways to spend mindfully, to find the balance between spending and overspending.
I could afford it, but that didnt necessarily mean it was a smart financial move.
Iwrote about the steps I tookto decide whether or not to increase my lifestyle spending.
You dont want to go into debt or stretch your finances thin.
Thats when lifestyle inflation becomes a problem.
Think about how the new lifestyle cost will affect your retirement goals or anything else youre saving for.
Consider the long-term effects: Think about what spending problems this new expense might lead to.
Lipovsky suggests a helpful strategythat weve discussed before:focus on percentage.
Spend a certain percentage of your income on housing, luxuries, savings, and so on.
You get to save more, and you also get to enjoy a better lifestyle.
Some may argue that lifestyle inflation is defined by living over your means, and thats one thing.
But simply spending money isnt inherently bad.
In general,money is just a toolfor financial freedom.
Its okay to spend it and live a better lifestyle than you did as a college student.
Illustration by Tara Jacoby.
