You probably spent your high school economics class learning about inflation. It’s easy enough to understand, right? Over time, prices rise, so the purchasing power of currency falls. Your money is simply not worth as much as it used to be.
Lifestyle inflation (or lifestyle creep) takes the concept to a material level. As your income grows, it will be worth less to you if your lifestyle keeps pace. It’s a human phenomenon—after a job promotion or significant raise, people find themselves increasing or upgrading their standard of living, either immediately or over time.
Maybe this means buying a new house or car, or increasing money spent each year on vacations or eating out. You can find yourself enmeshed in the same financial struggles you had three pay raises ago if you routinely pair a higher income with higher expenses.
As instinctive as it is to start spending any new income, avoiding lifestyle inflation is simple and can have a significant impact on your financial future.
Why Do We Spend Money on Things We Don't Need?
Since lifestyle inflation tends to impact those in the middle of their careers, when promotions and raises may be more common, it’s something for Millennials, in particular, to be aware of. Likely impacted by the Great Recession early in their careers, Millennials tend to be more reserved in their investment habits (only 51% have invested in the stock market, compared to 61% of Americans in the same age range from 2001-2008).1 Student loans and accumulated debt add an additional level of forced financial caution. But despite all this, the average Millennial reports spending almost $500 on nonessential purchases each month.2
The driver behind some of that "fun budget" spending is often the consequence of a comparison trap. Think of it as the Keeping Up with the Joneses effect (or maybe, Keeping Up with the Kardashians). Your neighbor gets a new car and, suddenly, yours looks a little dingy. Your college roommate starts going to the Caribbean every spring, so now your countryside Airbnb seems a little less glamorous.
Social media further perpetuates the harm caused by comparison. One third of Millennials say that social media worsens their lives—a significantly higher level than any other generation.3 Even though you know what you see on Facebook and Instagram is a glamorous snapshot of a distorted reality, the influence of social media is shocking, and Millennials are most likely to feel its impact in their perceptions and in their wallets.
Don’t let comparison and social media drive your spending habits. Take heart in knowing that success is not defined by material things. The car you drive and model of iPhone you own are in no way a measure of your career or life achievements, despite what ad makers and social media influencers say.