lifestyle inflation basics

Lifestyle Inflation and How to Keep it From Getting the Best of You

We all know what inflation is, but lifestyle inflation is a whole different animal. Lifestyle inflation can exist despite a thriving economy and it is the main reason why most Americans have less than $1000 of savings in their checking accounts. 

To put it simply, lifestyle inflation occurs when your income increases, and you begin spending more. Although some amount of extra spending is justified, and sometimes necessary, when incomes increase, some people just don’t put a cap on it. Eventually their spending outweighs their income resulting in lifestyle inflation. 

Lifestyle inflation is a common problem, but it can be avoided. This article will take a look at lifestyle inflation and what you can do to stay within your budget. 

Lifestyle Inflation Statistics

In America, lifestyle inflation is on the rise. In 2018, 69% of survey respondents said they had less than $1000 savings in their bank account. This is more than a 10% increase over the previous year as, in 2018, 58% of respondents reported having this dilemma. Furthermore, 45% of respondents said they had no savings whatsoever. 

When citing the causes of lifestyle inflation, most claim it is due to the high price of living. These people are living from paycheck to paycheck and feel an increased salary would help them start saving money. 

Others say that eliminating debt would also help them save. 18% of respondents claimed that lowering debt would work to improve their economic situations. 

9% said moving to another city would help. 

When it comes to demographics, it seems that women and the middle aged have the most trouble saving money. 51% of women have no money in their savings account as compared to 38% of men. 53% of respondents between the ages of 45 and 54 have no savings. 

Savings Goals

Now, let’s look at why people are saving.

Most people that are trying to build nest eggs are hoping that they will have money for their retirement. This is an especially common goal for adults that are 55 years of age or older. 

And while retirement is a worthwhile goal, experts say it can be risky to save for this time of life if you don’t have an emergency fund built up. Many people save for retirement and then end up raiding their retirement funds in times of emergency. This results in early withdrawal penalties that make for added expenses. 

Despite the fact that individuals are taking a risk by prioritizing retirement over emergency funds, it is still the most common savings goal with 26% respondents saving for retirement. Emergency funds savings takes second place with 19% while other Americans are saving for a car, a home or an education. 

How Are Americans Saving Money? 

Americans that do have savings tend to store their money in a traditional savings account. This is a preferred method as compared to a CD, a non-interest checking account, a piggy bank or a safe. 

Traditional savings accounts are a good bet for emergency funds because they are easily accessible. However, they have low interest rates, so they are not the best choice for long term investments. 

If you are looking to save for retirement, college funds a house or any similar investment, you will want your money to be earning interest. Therefore, accounts like a 401(k) or IRA will be a better bet.

Money Saving Tips

Most Americans blame their lifestyle inflation on a low paycheck. However, if there is wiggle room in your budget, there are ways to save money so that you will still have a bit left over for savings.

Here are some recommendations that have worked for me.

Get Motivated: A good way to get motivated to save is to think about what will happen if you don’t save. By not saving, you can wind up not having money when you need it most. This is a problem that can keep you up at night but instead of letting it get to you, it’s best to do something about it!

Create a Budget: Creating a budget can help people save money. That way, you can keep track of what’s coming in and where it’s going. What’s more, you can devote a certain amount of money to your expenses. 

Many people have trouble creating a budget because they don’t know how; others claim that when they do create a budget, they are unable to stick to it. However, the right educational tools and motivational techniques can help individuals overcome those obstacles. 

Make Saving Money a Priority: Instead of waiting until the end of the month to see if you can put any money towards savings, stash it as it’s coming in. Create a budget that allows you to put a certain amount of money into your savings account on a regular basis. Then stick to this budget. 

You can even schedule automatic transfers to make sure your savings continue to grow. Another way to do this is to ask your human resources department to automatically transfer a part of your paycheck into your savings account. 

Get Someone to Hold You Accountable: Just like any commitment, it is easier to stick to your word if you have someone that’s holding you accountable. You can share your financial goals with a friend or relative to try to stick to your goals. Alternately, the National Foundation for Credit Counseling has member agencies where you can sit down with one of their reps and work out a budget for free. 

Don’t Let Failure Get to You: A lot of people are reluctant to work out a budget because they are afraid they are going to fail. However, one way to guarantee failure is by not trying at all. 

Instead of being afraid of making mistakes, accept the fact that you might stumble a few times on your journey, but the important thing is to learn from your mistakes, so you are able to keep moving forward. 

Lifestyle inflation is a common problem but, in most circumstances, you will be able to find ways to set aside your money so that your expenses don’t overwhelm you. What steps will you be taking to reach your financial goals?