10 August 2007 4 Comments Print This Post  Email This Post

Many of us will go through many stages in life. If we work hard we’ll get raises, promotions, and increased business revenue. Getting a raise and making more money should increase your ability to save money and your ability to invest money. Ultimately, you should be able to invest more money and increase your wealth. So why are a lot of high income individuals broke? By broke I mean why don’t they have a high net worth that corresponds with their high income? Why are they almost living paycheck to paycheck? The answer is lifestyle inflation.

What is Lifestyle Inflation?

Lifestyle inflation is when you upgrade your lifestyle with every new dollar of earned income. Some words that come to mind are “Honey, I got a raise, now we can move into that lovely house we saw.” or “Guess what, I got a new job, check out my new BMW.” For every promotion, bonus, raise or other form of new income, lifestyle inflation will find a way to spend it. When this increased stream of income is supposed to fund your investments, its now used to fund an upgraded, needless lifestyle change.

Good and Bad Lifestyle Inflation

Don’t get me wrong, not all lifestyle inflation is bad. Upgrading your lifestyle throughout the years is healthy and provides a sense of accomplishment if you do it with balance and discipline. Here are some examples of good lifestyle inflation:

1. Making and enjoying improvements to your home. Most improvements such as bathroom and kitchen remodeling adds value to the home.
2. Upgrade your problematic car. It may cost you more in the long run to keep repairing an aging car. Replace it with a late model pre-owned reliable one.
3. Eat healthier. Like what my article about staying healthy and getting rich says, eating healthier has a lot of long term benefits financially, physically and mentally. Some healthy options may cost more and thats worth spending on.
4. Anything that truly improves your life and your stress levels while maintaining a good balance and budget.

Here are some examples of bad lifestyle inflation:

1. Buying a nicer, larger house. You pay more in mortgage, taxes, insurance, utilities and maintenance. The bigger the house, the more it will cost you until you sell it. More than likely you don’t need the extra space.
2. Buying an extravagant new luxury car. High end cars have larger engines, more expensive parts and race horse-like upkeep. A top of the line Mercedes not only costs more in the short run, but it costs an arm and a leg in the long run due to high depreciation, high maintenance, insurance, repair and fuel costs.
3. Buying extravagant items and getting used to doing so.
4. Eating out at higher end restaurants.

How Lifestyle Inflation Destroys Wealth

The main problem with bad lifestyle inflation is the dependency that is created. Your new found lifestyle now depends on the income that you bring in. Your higher living expenses, car expenses and extravagance expenses won’t pay for themselves. You will be forever dependent on your job or other primary income to maintain that. If at any moment an emergency comes up and your primary source of income is significantly reduced, you will be in a very tough position.

This relationship should be the other way around. When you receive more money due to a promotion or other source, that money should be invested so you have to depend less on your primary job if you maintain your lifestyle or healthy lifestyle inflation. Over the years you will have less stress, less worries and more money to enjoy. Your money will be working to pay for your healthy lifestyle rather than you having to working to infinity to maintain an overly extravagant one. Maintain a good lifestyle inflation rate, and your future self will thank you for it.