What Is It?
Lifestyle inflation is the process of increasing spending as income goes up.
The first experience most people have with lifestyle inflation is in the transition from college into their first job. In college, someone will live with several other people to bring the cost of renting down. They will opt for the generic brands of cereals and foods over name brands to keep their grocery bill down (or eat Ramen noodles for every meal). They will share rides back and forth to keep gas costs low.
Then they get that first job. They make a meager income, but compared to their college years, it's a fortune. Suddenly living with other people seems unacceptable. Generic foods have lost their luster, and Ramen has become the food of peasants. And their old car begins to look dingy and run down.
It is easy to see this concept play out in this stage of a person's life, but it doesn't stop there. Lifestyle inflation lasts a lifetime.
A Tale of Two Joes
To help illustrate lifestyle inflation, let me introduce two people, Average Joe (AJ) and Extraordinary Joe (EJ). They are identical in their lifetime income, but vary in how they spend it. Check out Average Joe in the fancy graph below:
AJ's income goes up at a nice and steady pace throughout his lifetime. Each raise brings an upgraded lifestyle into view. No matter how much income he brings in, it never gets easier to make ends meet. Notice how AJ's "Needs" are in quotation marks. That's because AJ does not have an idea of what he truly needs.
Let's check out Extraordinary Joe (EJ):
EJ has the same exact income and raises throughout his lifetime as AJ. However, EJ takes each raise he gets and automatically saves it until he can figure out how to best use it. Sometimes he uses it to pay off debt. Sometimes he makes more retirement contributions. And sometimes he spends it. Notice that his needs increase throughout his lifetime, but they are not directly correlated with his
The vast majority of people are like Average Joe (hence the name). Each
On the other hand, an increase in lifestyle as a person makes more income is not always a bad thing. Isn't that everyone's goal in making more income? To produce the type of lifestyle they want? Of