Lifestyle Inflation—What is it?

Advertisements are created to convince you to part with your hard earned money. They tell you that you need the new car, bigger house, latest fashions and expensive cosmetic products in order to be happy and fulfilled. All too often we fall for the advertising hype.

In the gospels of Luke and Matthew, we hear the verse about serving two masters. We cannot love God and money. When we take our eyes away from God and focus them on money, lifestyle inflation can occur.

Lifestyle inflation means you spend just a little bit more than you make in order to get to the next (perceived) level of affluence. As your salary increases it’s easy to justify treating yourself and your family to nice things. Once you make a little more money, you can afford a bigger house, a better car, a fancier vacation, and the kids deserve to have everything they want.

And this applies whether you make a little or a lot.

We have worked with many people over the years who have a generous 6-figure income, but they can’t seem to make ends meet. In fact, some people with a high income are in worse shape financially than the people on the lower end of the earning scale. The people who earn less money know they have to spend carefully. While the people at the higher end of the earning scale have more disposable income to use for lifestyle inflation.

A study done by Princeton University’s Center for Health and Well-Being found that happiness peaks at an annual income of $75,000, and then levels off for higher incomes. Yet it’s almost impossible to keep your lifestyle capped at a certain level when your income goes up.

The first area where lifestyle inflation shows up is the bigger car. The average payment on a new car is about $500 a month. On luxury models that car payment can easily balloon to $700 a month per car. Transportation is a requirement. But the kind of car you drive does not indicate the kind of person you are. Nobody but you really cares what kind of car you drive. If you are buying a bigger, fancier car in order to impress people, you are on a fool’s errand

Buying a larger more expensive house is another element of lifestyle creep. In the 42 years between 1973 and 2015, the average home size increased by over 1,000 square feet and at the same time, the American family got smaller.

A larger house means paying more for the mortgage, property taxes, maintenance, insurance, association fees and utilities. Plus, there’s the additional time, money, and effort required to maintain a larger home. And that bigger home needs more furniture and décor than a smaller home.

Selling and buying a home involves costs on both ends of the deal. As a seller, you’ll be paying realtor fees which are estimated at 5-6% of the sales price and your closing costs can range from 2-4% of the sales price. That means that as a seller if your house sells for $250,000 you may be paying as much as $25,000 in fees.

On the other side, as a buyer, you may pay as much as 2-5% in closing costs for things like application fee, appraisals, attorney fees, escrow, home inspection, title insurance, and on and on. So, if you sell a home for $250,000 and buy a home for $350,000, your out of pocket costs can add up to a whopping $42,000, without even considering the down payment on the new house!

Another mark of lifestyle inflation is buying your kids everything they want, and everything their friends have, everything they see, and everything they think they need. We know that parents want to treat their kids to nice things. But taking a one-year-old to Disney World or purchasing an apple watch for a nine-year-old, or buying a 16-year-old a new car may not be the wisest decision, even if you can afford it.

It’s so easy for lifestyle inflation to creep up on you when you forget about long-term goals and base your spending on how much money is available to spend. If you want to provide yourself with some budget breathing room when you get a raise, that’s great. But each time you make the decision to give yourself a little lifestyle boost, you are also hurting your ability to grow your wealth. Because when you spend more, you’ll have less to save.

Real happiness comes from enjoying the blessings God has given you, learning the virtue of contentment and thanking God in prayer for everything you already have.

Join the Compass Catholic podcast to hear more about Lifestyle Inflation.