Have you ever fallen into the lifestyle inflation trap? Are you in it now without even realizing it? Frivolous spending and lifestyle inflation can happen to anyone. It is one of the reasons why the lower and middle class have difficulty building wealth. That’s the majority of the U.S. population by the way. But it doesn’t have to be you.
Lifestyle inflation occurs as your income rises over time and you increase your spending to keep up. As you advance in your career or find a higher-paying job, you will be able to live a more comfortable life. Maybe you’ll buy a larger home or a nice new car.
To some extent, I believe it is appropriate to upgrade some of your life comforts as your budget increases. If you’re unhappy sharing a tiny apartment with two other roommates and you land your dream job paying $180,000 per year, by all means, get your own place.
Don’t burn your hard earned money due to lifestyle inflation
Why do people fall into the lifestyle inflation trap
I like a viral post from a few years ago that is still being shared on social media in some form or another. It’s something along the lines of: rich people nowadays wear torn jeans and Converse, while poor people wear LV and Gucci. It was apparently said by James Franco. What is more important is that it resonates because it is true.
One of the reasons why today’s rich dress in hoodies, jeans, and sneakers is that many of them are software engineers, who are inherently introverts. Another reason is that affluent people don’t seem to feel the need to draw attention to the fact that they are wealthy.
I don’t consider myself rich by any means, but working as a software engineer has allowed me to dramatically increase my income over the years. Having said that, I’ve been fortunate enough not to have had much opportunity for frivolous spending and lifestyle inflation.
But I’ve done some research and have observed my peers over the years. Honestly, there are too many reasons why people buy things they don’t need. If I had to sum them up in two words, I would say it’s due to human psychology.
Manipulation through marketing and advertisements
For instance, we are constantly bombarded with ads, both visual and audible. Businesses work hard and have large budgets to help persuade you to purchase goods you do not need. Buying products you don’t need is essentially frivolous spending.
Today’s advertising and marketing technology is highly advanced, and it is armed with data about us that we willingly provide. We all have smartphones that broadcast our lives, where we go, and what we purchase, making it easier for advertisers to target us and our emotions at the right time and place.
Ad-tech firms, with thousands of data points on you, allow businesses to use mass market persuasion, which you are now surrounded by. Corporations all over the world use human psychology to make you want something you don’t need by linking mass-produced products with your emotions.
There are some great documentaries on the topic that I highly recommend such as The Great Hack, The Social Dilemma, and The Century Of The Self.
Another way consumers are tricked into frivolous spending and lifestyle inflation is through planned obsolescence. The concept of planned obsolescence states that goods become increasingly obsolete and must be replaced due to improvements in design and the use of nondurable materials. I recently watched this video which reminded me how we all fall for this frivolous spending trap.
This one is a little more difficult to avoid as well, particularly when it involves your smartphone. We have become increasingly reliant on our smartphones for a wide range of tasks in our daily lives. So when Apple makes the iPhone’s battery die faster with the introduction of their latest iOS, you feel compelled to buy a new phone.
I have a perfectly good though older tablet that I can’t update because the new Android versions will make it unusable. Well, guess what, I’m not going to buy a new one. I downgraded my OS version and am still using it after seven years.
Trying to impress others
The worst kind of frivolous spending and lifestyle inflation, in my opinion, is when you start wasting money on things you don’t need just to impress others. Some people would go so far as to max out their credit card in order to look successful in front of someone they don’t even like.
Having said that, if you have a sincere interest in something and the financial means to afford it, then go for it. It makes no difference if it’s houses, vehicles, clothes, jewelry, or something else. Just forget the rest of what you don’t want.
In the end, you should only be concerned with impressing yourself.
How can you escape the lifestyle inflation trap if you’re already in it?
Don’t give up if you’ve already fallen victim to frivolous spending and lifestyle inflation. It’s really not that difficult to escape.
I believe that educating yourself will help you get out of this situation. Learn from successful people. Read self-help books and watch documentaries like the ones I mentioned above. They could be really eye-opening.
Make a budget and keep track of your expenses as they can also be powerful motivators.
Minimalism and the tiny house movements have recently gained widespread popularity. I believe this is due in part to our rebellious nature as humans. Many people are becoming fed up with being told what to buy in order to make themselves feel better (shopping therapy anyone?) Then eventually they’re tired of drowning in consumer products that they don’t even like.
To be honest, I believe that embracing minimalism would make you happier in the long run. It will not only lift your spirits, but it can also help your overall personal finance.
How not to fall (back) into the lifestyle inflation trap
Imagine you don’t have much savings or investments but you purchased some Bitcoins years ago and now they are worth $150,000 all of a sudden. You go out and get yourself a reward with those excellent earnings, right? Buy yourself the $100K Porsche you’ve been eyeing. Wrong!
First and foremost, you should consider your overall financial situation. Those earnings could certainly be put to better use. You could invest them in something that would make them grow further. Alternatively, you could simply HODL (as cryptocurrency enthusiasts would say) and wait for those Bitcoins to be worth a “gazillion” dollars each.
Second, that car is a depreciating asset. It loses value the moment you drive it off the lot. It never rises again, unless you take excellent care of it for 60 years and find a collector to sell it to at that point.
You get the point. The secret to avoiding frivolous spending and lifestyle inflation is to treat purchases with caution. If you’re currently living within your means and have money left over after paying all your bills, you should follow the standard advice and put some of it into savings and investments.
What to do
- Be your authentic self rather than the person you believe you should be in front of others.
- Block out the noise (i.e. the sophisticated targeted ads that bombard you on a daily basis).
- Limit or ideally eliminate watching TV. As an added bonus, this will save you money by cutting the cable bill.
- Install ad-blocking addon(s) in your browser. The best ones are uBlock Origin and AdBlock Plus. I have both of them installed.
- Learn more about managing your own personal finances. If you are reading this blog, that’s already a great start.
What not to do
- Don’t go into credit card debt for things like clothes, jewelry, or your grill.
- But also don’t be ultra frugal. That’s just not an enjoyable way to live your life. Unless that’s what makes you happy, then more power to you. Yes, you can cut your own hair but should you really?
- On the other hand, do you seriously need that hair style done every two weeks for the rest of your life? Probably not. Those expenses can add up.
- Don’t keep up with the Joneses. Just watch as they keep up with each other and enjoy the real life reality show.
I believe that almost everyone has a point in their life when they allow themselves to slip into the frivolous spending and lifestyle inflation trap. It is typically around the time that they find their first well-paying job or when they get a significant promotion and raise at work.
The unfortunate result of lifestyle inflation is that your savings and investments never really grow significantly. This means that in the long run, lifestyle inflation makes it harder for you to achieve your large financial goals. You will find it difficult to save for what is truly important to you while enjoying the temporary comfort of items that do not really make you happy.
If you’re going to spend money, spend it wisely and for the right reasons. Don’t do it solely for the sake of what others would think. Allow them to think whatever they want while your money grows at a rate that will make you and your family financially independent.