What is Lifestyle Inflation

Having more money means you can spend more money. It’s not because you need to, but because you want to. Take this example. Adam’s monthly income has increased from $3000 to $5000. So instead of taking the MRT, he’s now taking Grab. This is known as Lifestyle Inflation.

Investopedia says lifestyle inflation is when a person advances into a more profitable position at work, his or her monthly expenses typically rise correspondingly. To me, you can simply put it as: earn more money, burn more money. This actually happens with a lot of my peers, most of whom are in NS and receiving our less than favourable monthly allowance!

Also, this also applies when you receive a one-time “bonus” in your income. I’m hinting at the stimulus package payout of $600 we are receiving on 14 April!! Alright… read ahead…

Why Lifestyle Inflation Happens

  1. “Keeping-Up-With-The-Joneses” Mentality
    Many people feel the need to keep up with their friends. This could mean buying high-priced items, eating out a lot or buying the new video game. One might just be pressured to do so to keep up with the trend.
  2. Entitlement
    Some might feel that when their income increased, it’s due to their hard work. As such, they feel that they need to “reap what they sow”. They want to reward themselves for doing a good job. I’m not saying not to reward yourselves, but rewarding yourself too much can be a bad thing.

What if I don’t follow this “Lifestyle Inflation”

Not following this lifestyle basically means you would be able to save more. Here’s a chart for you to visualise the difference between maintaining your spending vs increasing your spending as your income increases over time:

By saving more, your savings over time would also increase faster than if you don’t save more. With this savings, you could pay your debts, build an emergency fund (click here to read more about it!) or even invest! (I’ll try to write something on investing sooooon.)

A Case Study: NS Life

Alright, as I’m currently serving my National Service now, this is something that I can relate to very much. In NS, we would have several rank advances, which comes with an increase in rank allowance!!! Recently, I personally experienced this myself and some of my friends were discussing about how much more they can spend with the increase in our allowance. (and of course it prompted me to write this!). In the following chart, it shows a comparison if one were to maintain their spending throughout their NS life (which is me) vs someone who spend 90% of their allowance (which are my friends, hopefully they do save some and not spend their allowance wholly):

*The increase in the expenditure in the 6th month is due to me ending my training (during which meals are provided) and starting working shifts. This means that I need to spend money to buy our lunch/dinner, but meal allowance is provided hence the increase in the allowance as well.

The above chart is just an estimation but it’s a good visualisation of how much you (or I) can save just by having the discipline to maintain your spending. Now who says NS is useless?! It teaches you meaningful lessons about money!

Closing Words

Lifestyle Inflation is a habit that people usually develop when they start their working life, when they are so eager of getting a huge paycheck. But remember, you have about 40 years of working life in front of you and spending that hard earned money freely can jeopardise your retirement.

If you’re still in your early 20s like me, use this time to develop a good spending and saving habit. If not, it’s never too late to start doing good things for yourself! Spend well and stay safe out there!!