How To Stop Lifestyle Inflation From Gobbling Your Wealth (2024)

How To Create A Lifestyle Budget Fit For Your Finances

When your expenses increase along with your income you’ve fallen into the game of lifestyle inflation also known as financial creep.

Lifestyle inflation can cause a fiery financial disaster if you’re not careful about how you manage your money.

You can be rich and broke and you can be poor and broke or you can live life according to a budget and build wealth.

A buddy of mine regrets buying a new BMW when he landed a new job and he’s not alone.

Lifestyle inflation plays with your mind if you let it and can lead you into deep financial debt.

Lifestyle Inflation Creeps Up On You

What is lifestyle inflation?

It’s almost like finding $20 on the ground and just spending it frivolously without thinking how else that $20 can better be spent.

A new job that pays you far more than the last or an income boost from your current employer is wonderful news.

What’s not money smart is when you take that increased income and put it towards increasing your lifestyle.

This is what is called lifestyle inflation and becomes a whirlwind of money up’s and down’s if you’re not careful.

In the past, I’ve written many articles about how to handle situations where you may run into financial troubles.

Job loss
Employment Changes
Health problems
Family matters

Financial Rules For Financial Success

I don’t know how many times I’ve heard of rich people going bankrupt and poor people finally getting it together.

There’s no magic scientific data that will help you become debt-free but what is available are financial tools.

In the world of finance, there are rules, one of them being to spend less than you earn if you want to get ahead.

I know some people may challenge that perhaps if there is an investment that will yield great results.

This is true, investing in real estate for example might be a tight purchase but may reap rewards years to come.

Some investors rely on rental income to pay for the mortgage if they can’t afford it themselves or to earn more money.

Rental income can be iffy and there may be times when the place is empty. Can you afford the empty rental payments?

Should you do this at the expense of going broke in the meantime? – Risk is tough but for some, it pays off.

What about if you’re rich and buying multi-million dollar homes and need to sell at a loss?

It happens and happens often decreasing net worth and eventually, if that keeps up they’ll run out of money.

This is just another reason why you should never rely on your real estate investment as your retirement income.

It doesn’t matter if you’re rich or living with little savings any money lost is money coming from your pocket.

Eventually, if you do this too much you’ll end up with potentially nothing at the end but bankruptcy.

How Much Lifestyle Inflation Are You Willing To Give?

How many of you are willing to save every dollar into buying a house without thinking of possible consequences?

I can tell you that people do this especially right after they get a new job or a big raise.

We only have to look at how many people have lost their jobs due to Covid-19 as a recent example of a giant economical mess.

Best part is that it’s not slowing down yet so if you’re fortunate to get a raise hang on tight.

You can’t just forget about debt and just invest in real estate and believe all of your financial problems will disappear.

Lifestyle Inflation Feelings Of Success

Lifestyle inflation boosts those good endorphin feelings that we get inside when we achieve something great.

There’s something about your boss patting you on the back saying you’ve done a great job and here’s your bonus for the year.

Or, perhaps you’ve landed a new position in the company you’ve worked for years and it pays almost double your income.

Showing off to friends and family how successful you are won’t get you very far either.

Buying a fancy car won’t pay your bills.

Expensive clothing that you can probably replicate for less somewhere cheaper means nothing.

Do you really think people look at your labels?

I sure as heck don’t care what anyone wears as long as they’re wearing something.

Financial Advice As A Financial Tool

What it all boils down to is how you control the urge to spend and manage the money you didn’t have in the first place.

There’s a reason why lottery winners get advice before they rush out to get their 50 million dollar cheque from the OLGC.

Financial advice is powerful especially if you don’t want to lose everything you’re getting which can be overwhelming for some people.

You’ve worked for minimum wage your entire life and then suddenly land a career with an $85,000 salary.

Minimum Wage Yearly Ontario

Ontario Example:

Let’s say you go from working full-time earning minimum-wage earning a gross income of $29,400 ( including 3 weeks total of holidays and statutory weeks.

Hours per week 40 x (52 weeks per year – 3 (Holiday + Statutory weeks) ) x 14.00 hourly wages = Annual Salary

This is your gross income and not your net which means you still need to pay taxes on this money.

Your net pay after deductions would be approximately $24,086.

Ontario Salary increase to $85,000 yearly

Calculation source: Neuvoo.ca

So you are going from a net income of $24, 086 to $62,861 with a difference of $38,775

That’s an extra $3231.25 every month compared to what you used to take home.

How would you manage that money?

These are just rough estimates I’m putting out there but consider there could be even more expenses.

Buy An Expensive Car $8000 down and $900 monthly payments for 5 years $10,800 (plus maintenance/insurance)
Vacation $5000
New Furniture $3000
Designer Clothing/Shoes/Accessories $2500
Gym Membership or Club Membership $120 month $1440/ year
Eating Out $ 100-week x 52 weeks $5200

That alone totals $27,940 decreasing your bottom line to $10,835 to pay down debt, save for a downpayment on a home (if you want one), create emergency savings, increase or begin your RRSP, or TFSA.

Keep in mind that you must pay for the new vehicle for the next 5 years.

Lifestyle inflation can quickly take over and you’ll see yourself in potentially one of these situations or even all.

Debt to income ratio is out of whack and takes over
Savings are far and few
Little to no retirement savings
Home downpayment dwindles instead of increases

As you can see it’s very easy to blow massive amounts of money in a year with lifestyle inflation.

If you’re not careful the excess income you are enjoying can spill over into debt overload.

For some people, immediate lifestyle inflation will occur and for others, they take the time to figure out how to grow that money.

Those are the smart people.

I’m not saying you shouldn’t spoil yourself but there’s always something greater to consider other than clothing, holidays, jewellery, and general stuff you can do without.

If you have a financial advisor or even if you don’t make a phone call and set up a meeting to talk to one.

Getting solid advice from someone who knows what they are talking about will help ease your mind.

How To Control Lifestyle Inflation

I just went through a wage increase from my employer, not once but twice but there’s no lifestyle inflation happening here.

Mind you, we’re not talking mega-buck lifestyle inflation for me but an extra $6000 is a nice pay rise every year.

As you may have guessed I work in a union environment so I’m not at the top level of my earning potential.

Every year around August I get about $5-6k increase for my yearly wages until I reach the top income level.

I’ve still got about 10 years to get to the top of my castle and along the way, everything is going to get expensive.

As well, I get any union increases that were or are negotiated with my employer which is kind of what happened here.

Anyways, to make a long story short we have extra cash that some people may consider valuable to pay the debt, save or invest.

Then there are those people who dive into financial wealth increases with lifestyle inflation.

Even the little expenses add up to big ones over time, coupled with economic inflation and you’re back at square one.

6 Ways To Control Lifestyle Inflation From Eating Into Your Wealth

So how do you control lifestyle inflation?

There are a few ways that you can prepare yourself which I will discuss below.

Keep in mind that each of your lifestyles is different so you must find what works best for you.

For us, we control any lifestyle inflation the best we can with a budget, willpower, goals, financial advice, and remember that anything could happen.

Yes, we are debt-free including our mortgage but we never take that for granted.

1. Outline Lifetime Goals – Short-term and Long-term

What are your short-term and long-term goals, for example?

I’m going to tell you right now that some of your goals will never happen. That’s reality, however, that doesn’t mean you should try.

Setting goals is as easy as sitting with yourself or partner and thinking about what you want from life.

Related: How to create goals (free budget binder printable)

Write your goals down and include costs that might be involved with your goals and how you plan to reach them.

You may need to revisit your goals monthly or even yearly to see if they align with your current budget and lifestyle.

In some cases, people lose their jobs, quit, have health problems and so on which affect their goals.

2. Create A Low Budget Lifestyle

Without hesitation, a budget should be part of every household whether you are in a relationship or not.

A low budget lifestyle is a budget that takes into consideration all the budget categories that are critical every month.

These are typically expenses that are fixed expenses and variable expenses while taking into consideration savings and investments.

Paying yourself first is key which is what we do with our zero-based budget although other budgets might fit your lifestyle.

Budgeting Jars
Envelope Budget
Irregular Expenses Budget
50-30-20 Budget
Excel Budget
Pen and Paper Budget

Also, find ways to save money whether it be from choosing a bank with no fees or saving money using Canadian rewards.

A KOHO Pre-paid VISA card is a great way to help you budget and save your money by allowing you to set up savings and see where your money is going. This allows the user to spend smarter.

Invest your money in banks that have no fees such as Simplii Financial or EQ Banks in Canada.

Tangerine Bank is another Canadian Bank Account without a brick and mortar business that we belong to without bank fees.

3. Moderate Changes

This means that it’s ok to make gradual changes to your lifestyle but do so in an affordable manner.

Valuing experiences over buying stuff you don’t need makes for even more money to set aside for bigger goals.

4. Avoid New Debt

When your income increases the last thing you want to do is create new debt if you don’t have to.

I’m not talking about buying a new house or going back to school but consumer debt that you can control.

You will always have the ability to say NO so if you’re mindful of your spending and think before you spend you’ll be in a better place financially.

5. Financial Sacrifice

It’s nice to have everything but having everything you want comes with a big price-tag.

Financial sacrifice means going without or perhaps saving for something until you have the money in full. ex: a vacation

Keep in mind that you must prioritize what is important in your life and by creating a budget you’ll understand how much money you have to work with.

Just remember that stuff never lasts especially when it goes out of style the next month, two months, or year.

6. Automated Savings

Whether investing in a tax-free savings account, retirement savings account or any other investment accounts paying yourself first is a win.

Consider yourself part of the team that oversees your business (you) and you get a paycheque at the end of the day.

By doing so that leave less money on the table for you to blow and more invested in what will help with your future.

For example, our projected expenses, emergency savings, and retirement savings are either transferred or auto-paid from our bank account.

Also, buy automating your savings it assists with building your emergency savings fund for present important situations.

Your Wealth Consumes Lifestyle Inflation If You Let It

In the example above the only way to increase the bottom line is to cut back on expenses such as the yearly holiday, clothing, and eating out.

For some people, there is no possibility to cut back especially if they overspend into the negative but have ongoing costs such as a vehicle payment.

In that case, the only way to increase the bottom line which would be capped is to earn more money.

Lifestyle inflation is great in the short-term to have a bit of fun but can terrorize your long-term goals and investments.

Oh, and as for my friend who bought the expensive BMW he’s cutting his losses, selling it, and buying something economical.

Live and learn and sometimes it’s the hard way but that’s how we grow as adults.

Discussion: How have you handled an increase in wealth or income and did you fall prey to lifestyle inflation?

Leave me your comments and experiences below on this topic as I’d be interested to read your feedback.

Mr.CBB