The Perils of Lifestyle Inflation

When a person receives a substantial raise at work or begins a new job that enlarges his paycheque, his eyes glisten and he goes home with a smile on his face.

Images of cars, vacations, electronic gadgets, and other fancy things materialize in his mind. He imagines himself attending more lavish parties and dining at posh restaurants. He revels in his new-found vanity and radiates exuberance. He is transfixed by the size of his bank account and feels like a gladiator.

This common phenomenon is know as lifestyle inflation. It’s the tendency of people to match their lifestyle with their income. As their income increases, so to does their spending. They literally spend more because they can afford to.

In Canada, a country distinguished by abundance, freedom, and a fairly reliable social safety net, people have the privilege of pursuing their material and social needs in ways that were not possible in the past (and are not possible in many other countries). Indulgence in materialism is one of the hallmarks of the West.

Lifestyle inflation also stems from human psychology and social relationships.

Human societies develop natural hierarchies that reward those at the higher echelons with more power, status, money, respect, privilege, material possessions, and, of course, higher sexual market value. Being at the top of the dominance hierarchy is desirable, while being at the bottom is to be avoided at all costs.

It’s no wonder that people fight like mad for a raise; any little extra money they earn will enable them to spend more to elevate their status in the social pecking order. While they are eager to spend it on material possessions to satiate their temporal and carnal desires, money also signals to others their social status and overall value. The more money they accrue, the higher their rank will be (or at least they will be perceived that way).

In our highly competitive and consumerist society, we have a penchant for acquiring more and more material possessions. And because we are social animals that naturally develop hierarchies, we are hard wired to want more and more of everything in order to help us climb as high as possible.

The dark side of lifestyle inflation is that it’s not financially responsible. If you’re goal is to save for retirement, pay off debt, or establish a savings plan to purchase a home, lifestyle inflation will not help you achieve those goals. In fact, it can move you further away from them, and put you in a more financially precarious situation.

Many people are of the mistaken belief that an increase in income is permanent. But this is an incredibly short-sighted way of thinking.

All you’re boss has to do is say “You’re fired,” and your income stream is immediately severed, leaving you in a vulnerable situation.

Lifestyle inflation can also have an impact on an entire economy. Alberta is the quintessential example of an economy that paid the ultimate price for wallowing in a lifestyle (including the government itself) that had no guarantee of continuing in perpetuity.

When the price of oil hovered north of $100 per barrel, the province was dripping with affluence and excess. Jobs were plentiful, real estate valuations were soaring, and vacuous shopping sprees were common. People armed only with high school diplomas were earning stupendous amounts of money. The economy was flush with disposable income and high optimism.

All that changed when the price of oil collapsed. Mass layoffs ensued and entire projects in the province’s oil sands were stopped or put on hold. Capital expenditures diminished, investors pulled their funds, and the economy contracted.

Those who spent their money on the transient and trivial paid the biggest price. With their income stream cutoff they were left with nothing of value. Whatever money they had left had to be allocated to the payment of credit card debt, auto loans, and other expenses accumulated during the “boom” phase of the economy.

Rushing to spend every incremental increase in disposable income on consumer goods is not a sensible and well-thought out plan. Consider doing the following instead.

  • Invest your money in a financial asset of your choice in a tax free savings account.
  • Put the money towards learning a new skill (or one that complements your existing job, enabling you to do your work better and increase your chances of a promotion) to ensure you will be employable in the future.
  • Pay down debt (ensure that you pay down the debt that you’re paying the most interest on)
  • Put more emphasis on experience rather than material possessions. Use some of the money to go on a modest vacation to recharge and spend more time with family and friends. Vacations are one time expenses as opposed to recurring ones, such as an auto loan or monthly rent charges.
  • Start an emergency savings account if you don’t already have one. You’ll need funds stored away when times get tough. Alleviate stress by ensuring you can withstand the economic storm when it hits.

In short, have some fun with your expanded bank account, but be prudent enough to realize that splurging on consumable items is irresponsible, and may come back to haunt you. Put some of the money to good use by investing in financial assets, investing in yourself, and investing in enjoyable and life-affirming experiences.

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