If you earn more money, you spend more – this is called lifestyle inflation. When does this phenomenon become problematic and what can be done about it?
In addition to classic inflation, in which prices rise and money loses value at the same time, there is also so-called lifestyle inflation. This term describes the phenomenon that most people tend to spend more money when they earn more.
Higher spending is not inherently wrong
First, it’s important to note that lifestyle inflation in itself isn’t necessarily a problem – after all, there’s nothing inherently wrong with increasing living standards. Nevertheless, it is important to be aware of the phenomenon and to keep an eye on expenses, even if you have a higher income. Because: In phases with higher income, building wealth plays a particularly important role. However, if after a salary increase there is as little money left at the end of the month as there was during training, no more money can be put aside. This becomes a problem when income falls again at some point, but at the latest when they retire, most people will clearly notice a neglected accumulation of assets – which in many cases also serves as retirement provision.
What expenses are really necessary?
So if you notice that lifestyle expenses are increasing and there isn’t enough money left over at the end of the month to build up your assets, you need to take action. In concrete terms, this means that you should think carefully about which expenses you really need and which ones are not really necessary. As a guide, it can help to consider whether or not you missed certain things before the raise. If this is not the case, the associated costs can be deleted. But because controlling lifestyle inflation isn’t about stopping spending money at all, you can still afford other more important things.
There are many ways to curb lifestyle inflation without sacrificing much. You can buy fashionable second-hand instead of new clothes and a refurbished device instead of a new electrical appliance, or you can prepare coffee at home according to your own taste instead of buying it to go.
How to deal with lifestyle inflation correctly: an individual financial plan
Ultimately, it is important to set budgets and not to lose sight of finances. A financial plan can help. This should be created individually and based on your personal financial situation: If you don’t want your standard of living to fall sharply when you retire, you should calculate the savings rate based on your own expenses and the amount of your pension. It may be tempting to focus too much on the savings rates of friends and relatives – but it is risky, because they may have significantly less spending at the moment and are therefore planning to spend less in the future.
Editorial team finanzen.net