How to manage lifestyle inflation to keep your long-term goals on track

Like inflation, lifestyle inflation could affect your finances, and you might not be aware of the effects straightaway. Find out how it might impede your ability to reach your goals and some ways to manage it.

Lifestyle inflation refers to the tendency for spending to increase as your income rises. Often, this spending goes on luxuries, which may come to be perceived as essentials as you become accustomed to them.

Lifestyle inflation isn’t automatically bad. Indeed, it’s normal to make changes to your lifestyle as your finances improve. However, it’s important to look at what your additional spending is going on – is it making you happier? 

There is also often a tendency to focus on how an increase in income could boost your lifestyle now. Perhaps you’re looking forward to an extra holiday each year, attending fine-dining restaurants, or simply having a higher disposable income. 

Yet, a boost to your finances could be used to support your long-term plans. Rather than spending it now, placing the additional money into your pension or investing through a Stocks and Shares ISA might allow you to retire earlier. 

Being aware of lifestyle inflation could help you make informed decisions as your financial situation changes. 

6 useful tips for managing lifestyle inflation

1. Create a budget 

Creating a budget and regularly reviewing it could help you balance increasing your spending now and putting money aside for the future. It could mean you feel comfortable enjoying the results of your hard work, without worrying that you’ll derail long-term goals. 

2. Allocate a use for each pot of money

Splitting your income or wealth into different pots could be one simple way to effectively manage lifestyle inflation. Having an account that only holds your disposable income could allow you to indulge guilt-free when you want to treat yourself.

You might also use other pots for essential outgoings, medium-term goals, and long-term aspirations. When your finances improve, you may then decide how to split the additional income or wealth between these different pots to support your overall wellbeing. 

3. Automate your long-term savings

Unmanaged lifestyle inflation could lead you to spend more than you expect day-to-day.

One solution is to treat payments into savings or investments as an essential outgoing. You might do this by automating a payment, so it leaves your account in the same way as household bills. This could prevent you from unwittingly overspending in a way that might derail your long-term plans.

4. Avoid social comparisons

The 26th President of the United States, Theodore Roosevelt, is often attributed with the quote: “Comparison is the thief of joy.” More than a century after he’s reported to have said it, the saying still rings true.

Trying to match your lifestyle to others who appear to be living more extravagantly might mean you don’t fully enjoy what you already have. If you try to keep up, you might experience lifestyle inflation.

Remember, you often only see a snapshot of other people’s lives. Rather than comparing, try to focus on what would make you happy and the steps you could take to turn this into a reality.

5. Implement a delay before making changes 

If you’re tempted to make a large purchase or a big lifestyle change, implement a delay before you proceed. A simple break could help you filter out short-term impulses, so you can instead focus on what will really have a lasting, positive effect on your life. 

6. Use a cashflow model to understand the impact of your decisions 

Finally, working with a financial planner to create a cashflow model could help you understand the impact of your financial decisions.

For example, after a large pay increase, you might model the effect of adding 25% of the increase to your pension on your potential retirement income. You may then look at how the outcome would change if you increased it to 50%. 

By visualising how your decisions will affect long-term financial security, a cashflow model may help you strike a balance between short- and long-term lifestyle goals. 

The outcomes of a cashflow model are not guaranteed as they rely on accurate data and make certain assumptions, such as projected investment returns. However, they can be a useful tool when you want to understand how different options will affect your long-term finances. 

A regularly reviewed financial plan could help you assess how to use your wealth 

Reviewing your financial plan as your income or assets change could identify how you might use your wealth to support your wellbeing. Please contact us to find out how we might work together. 

Please note:

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts. 

The Financial Conduct Authority does not regulate cashflow modelling.