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Lifestyle inflation, also referred to as lifestyle creep, is when you increase your overall spending to support your lifestyle habits. This can be as a result of a new job or promotion that has resulted in a higher income, or simply a continuous desire to keep up with peers in terms of buying the latest phone, a better car, or even a larger house.

For many, the main problem with lifestyle inflation is that no matter how much you earn, the constant desire to spend more, and often the escalating costs, means you remain stuck in a cycle of living from paycheck to paycheck.

Why is lifestyle inflation often a problem?

One of the ways lifestyle inflation becomes a problem is because it can slowly creep-up on you:

Think about it in terms of a simple t-shirt. When starting-out in your career, you may be able to afford to spend £5 on a t-shirt from a standard high-street shop. Let's say you then start earning an extra £5k a year; you may now decide that you can afford to purchase a £25 t-shirt from a slightly more expensive clothes shop.

Five years down the line, your income increases again, and you now start buying designer t-shirts that cost over £100.

Firstly, can you really tell the difference in quality between a £25 t-shirt and a £100 t-shirt or are you simply buying the more expensive one because you can?

Secondly, if you are always spending the extra money that you earn on life's luxuries, it is highly unlikely that you are planning for the future in terms of savings, investments, and pension plans.

Lifestyle inflation is a vicious cycle, and one that is hard to break once you are in it.

What's more, this cycle of living paycheck-to-paycheck means that your left without any kind of financial support should something unexpected occur. For example, the recent COVID-19 pandemic has meant many have had to adjust their income and resort to digging into their saving - but what if there are no savings to fall back on in hard times?


How to limit lifestyle inflation

Fortunately, if you are caught up in a pattern spending more and saving less, there are ways in which you can limit lifestyle inflation and cut your lifestyle costs without feeling like you are completely going without life's little luxuries.

Determine your increase in income

This may seem obvious, but you will be surprised at how many people do not know what a gross income increase of £5k a year looks like in terms of monthly net income. Therefore, before you start thinking about what you are going to spend your income on, make sure you first take the time to determine exactly how much more money you will have in your bank account each month.

If you work on commission or your monthly bonus has been increased, remember that this is not guaranteed money, and you should not treat it as such.

Make gradual adjustments

If you've recently got a new job or promotion and are already thinking about leasing a brand new car or moving to a bigger house, you may be jumping the gun a bit.
What would happen if the worst-case scenario played out and your new position didn't work out? How would you afford your higher monthly mortgage payments or new HP fees?

Instead, make the decision to reward yourself with smaller purchases and then re-evaluate how you are going to spend your extra income in 3-6 months' time.

Be wary of more debt

If you already have a mortgage, credit card debt, or even a student loan, you may be tempted to increase these debts safe in the knowledge that you can afford the higher monthly repayments. However, this is not the smartest move when it comes to looking at your long-term money goals and the security of your financial future.
Instead, why not decide to pay more off your current mortgage each month so that you can be mortgage-free sooner? Or choose to pay off your highest interest debts so that you are not throwing away your hard-earned cash on bank fees?

Surely this has got to be better than signing up for more debt and tying yourself to the rat race for longer?

Start an emergency savings fund

Another fundamental flaw in lifestyle inflation is that you are still left in the lurch if an unexpected bill or expense occurs. You may be earning more money each month, but if all that extra cash is simply going towards new extravagances, then how will you be able to pay for unforeseen costs?

Let's say your boiler breaks, and you don't have boiler cover, or you have some unexpected emergency dental work that needs urgently doing; if you don't have the money, emergencies like this will need to be paid for another way, and that is usually through a loan.

This is why it is crucial that you have an emergency saving account for instances such as this. Not to be confused with long-term savings such as an ISA or investments, an emergency savings account should be able to be accessed as and when you need it, and as a rule, you should have between 3-6 month's salary put away.

However, if something does go wrong and you need some emergency funds fast - don't panic! There are many short-term loan options and it is worthwhile researching which one is right for you. For example, you could consider a logbook loan, which allows you to borrow cash against the equity of your vehicle.

Look into investments

If you are in the fortunate position of recently having a salary increase, then now is the time for you to start looking into long-term investments.
For those who are new to investing, this can seem like a daunting prospect with concerns over the value of your money going down. However, it is worth noting that the stock market tends to do better than cash over the long-term and will provide you with a way to enjoy greater returns on your investment.

As a general rule, if you are over 30 and want to save for the future  (i.e. retirement), then investments should play a part in your overall savings plan.

Benefits of investing include:

  • Potential for better returns
  • Cash savings can diminish in value over time
  • Allowing you to achieve your long-term saving goals
  • You can choose a level of risk you are comfortable with

Practice mindful spending

If your main problem is controlling your desire to spend, then you are far from alone. In fact, you may be surprised to discover that the average debt per adult in the UK currently stands at a whopping £30,575, with the average Brit spending £972 a year on interest alone.

Whether it is about 'Keeping up with the Joneses' or being drawn in by clever marketing, UK consumers need to learn how to practice mindful spending before it is too late.

What exactly is mindful spending?

Think about your last week at work. Was it stressful? Come Friday, did you feel that you deserved a reward for simply getting through the last five days?

Did this "reward" manifest itself as a new pair of jeans or a new handbag? If yes, then you are guilty of needing immediate gratification, and unfortunately, this can have a seriously detrimental effect on your ability to pay off debt and to save money for the future. Instead, try and take a mindful approach to shopping and spending by:

  • Tracking your spending
  • Removing your payment details from your online shopping accounts
  • Using cash rather than cards
  • Making a list of what you need rather than just "winging-it"
  • Taking 24 hours to reflect before making a purchase
  • Having designated guilt-free shopping money
  • Value experiences over possessions

You may think that the latest iPhone or newest Range Rover model will make you happy but if you fast forward 30 years, it will be the experiences that you have enjoyed that will stick in your mind rather than the things you have owned. Therefore, why not spend some of your income normally reserved for material things on activities? Whether this is on your own, with your partner, or as a family, making memories is arguably what life is all about.

Get everyone on board

It can be much harder to limit lifestyle inflation if your partner or friends are not also doing the same. Of course, you cannot force anyone to stop spending their own money, but you can educate others on the importance of both saving for the future and enjoying the today without focusing too much on possessions.

If your spouse is a spender rather than a saver, this can be particularly difficult, but it can still be done. Simply, try the below techniques:

  • Help them to identify their spending triggers
  • Make spending decisions in advance to avoid impulse buying
  • Keep communication open and honest
  • Help them to create better spending habits
  • Start small

Limiting lifestyle inflation is not an overnight process. It will take time and commitment, but you will most certainly not regret spending less and saving more in a few decades.