Avoiding a Lifestyle That Hurts You

Lifestyle inflation is a serious problem for high-income earning individuals like optometrists, medical professionals, lawyers, engineers, executives, or even business owners. The tricky part is: you may not even realize you’re living beyond your means.

We all want to live a high-rolling lifestyle. It would be incredibly satisfying to have the exact house you want with updated features, a brand new car in the garage, a trip to Bali, and the ability to eat at five-star restaurants every night of the week.

You might be laughing to yourself, saying, “Yeah, right. Dream on, Tony!” These examples might be a little far-fetched. But the fact of the matter is, we all fall into the trap of buying a bigger life than we can afford from time to time.

This concept, called lifestyle inflation, is a serious problem for high-income earning individuals like optometrists, medical professionals, lawyers, engineers, executives, or even business owners. The tricky part is: you may not even realize you’re living beyond your means.

What is lifestyle inflation?

Lifestyle inflation is defined as increased spending that corresponds with increased income. It typically happens when you get a promotion or a raise. But in the case of professionals in the medical field, it can happen as soon as you land your first full-time job.

Because young medical professionals have gone so long without income, they’re often in a hefty amount of debt when they graduate. They’ve taken on student loans, car loans, and credit card debt to put themselves through school and residency. Now, with their full-time job, they’re earning so much more than they ever have before. Unsure of what to do with the excess income, they often fall into a lifestyle inflation trap.

How does lifestyle inflation negatively impact your life?

By definition, an inflated lifestyle is inflated. You’re outspending what you make, which puts you at a financial disadvantage. If you continue to increase spending as your income increases, you won’t be able to check off some major financial “to do’s”. A few things you typically aren’t doing if you’re living an inflated lifestyle are:

  • Paying down your debt.
  • Building an emergency savings fund.
  • Contributing to your retirement fund.
  • Saving for your kid’s college.
  • Saving for other spending goals – like buying a house or a new car.

This is a problem. However, the deeper problem lies within what happens if you look 10+ years down the road. If you keep up the lifestyle you’re living, it eventually won’t be enough. When you’re overspending, you’re likely not spending intentionally. The things you buy provide a temporary high, or a moment where you feel successful.

We all want to feel like we’ve “made it” – but if you keep overspending, you’ll continually need to increase your spending to get the same successful feeling. This will lead to more debt, more stuff you don’t need, and a less balanced financial life.

How do you know if you’re living an inflated lifestyle?

You may be rolling your eyes at this point. “Tony, I don’t own a boat. I always have more money coming in, and I pay off my credit cards each month. I’m good!” If this is you, the next step might be unpleasant.

Step One: You need to take an honest look at your financial situation. A good reality check is to sit down with a pencil and a pad of paper and write it out. First, list out all sources of income. This could include your salary, any rental income you receive, or interest payments on savings.

Next, write out your expenses. Start with the things that are essential – your rent or mortgage payment, car payments, minimum monthly loan payments, utilities, groceries, etc. Then write out the non-essential expenses. This is where you need to be honest with yourself. If it helps, pull up last month’s bank and credit card statements. What did you spend money on? Write it down.

Does your spending outweigh your income? If yes, you’re living an inflated lifestyle. If no, move to the next step.

Step Two: If you don’t think you’re living an inflated lifestyle because you make more than you spend – you might be right. But the truth is, you could still be making poor spending decisions that indicate lifestyle inflation creeping in.

In this step, we’re going to look at your net worth. List all of your assets. This includes your cash savings, investments, retirement accounts, home, cars, and more. Then, list your debts. This is your student debt, mortgage, credit card balances, car loans, and any other debt you’re carrying. Does what you owe outweigh what you own?

If you’re still carrying heavy student debt, it’s likely your debt outweighs your cash savings. Ideally, your total monthly debt payments make up 30% or less of your monthly income. If this isn’t true – you’re likely carrying too much debt, and paying it needs to take priority over spending.

How do you correct lifestyle inflation?

It’s not easy to look around and realize that you’ve been overspending. It’s even harder to cut back and prioritize debt repayment and saving over spending. This isn’t just because the stuff we spend money on adds value to our lives. In fact, the stuff we’re dumping money on often doesn’t add that much value or happiness to our days. But it’s hard to let things go because we all have a sense of entitlement, or a drive to keep up with the Jones’s.

You’ve worked incredibly hard to get where you are. It’s easy to look at colleagues and say, “They have a new car, and I make good money. I deserve a new car, too!” But that logic will get you nowhere, and it definitely won’t leave you with a sense of fulfillment.

To correct lifestyle inflation, I recommend two things:

  1. Get honest with yourself and set a budget. Personally, I recommend the 10/20/30/40 budget. It’s simple and forces you to prioritize charitable giving, saving, and debt repayment. 
  2. Take stock of what’s important. What activities, things, or hobbies fill up your cup? If it’s exercise, look to spend more of your “fun money” on fitness and health. If it’s spending time with family, refocus spending on making memories with your kids. When we start to spend money on things that actually matter to us rather than just more stuff, we feel fulfilled and ultimately spend less on the stuff that doesn’t matter as much.

I’m not a believer that you should deprive yourself of anything cool. After all, you do work hard. And you have worked hard to get where you are. A little pat on the back every now and again is completely healthy. But falling into the trap of “more” is a surefire way to hurt your financial life both now and in the future – and you deserve more than that.