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Managing Lifestyle Inflation

“Spending is quick, earning is slow” ~ Russian Proverb

Generally, people have a strong inclination to spend more if they have more.  There is a tendency among most individuals to increase their spending whenever their income increases, this is called lifestyle inflation. It is often experienced when an individual increases their expenses following an increase in income. It tends to continue each time someone gets a raise sometimes making it perpetually difficult to get out of debt, save for retirement, or meet other long-term financial goals. Lifestyle inflation is what causes some people to get stuck in the rat race of working just to pay the bills.

Lifestyle inflation is not necessarily a calamitous thing and is actually a fundamental “psychological law” of consumption. After all, we work hard to improve our standard of living. In some cases, this inflation is even unavoidable. You may have to spend more money to dress appropriately after a promotion. Similarly, it is natural for people to move to bigger houses and buy better cars as the family grows. In other words, there may be times when increasing your spending may be necessary. Your situation will change over time both professionally and personally and you will likely have to spend more money on things you previously avoided altogether. A certain amount of lifestyle inflation is to be expected as your work and family obligations evolve. Spending a little extra to improve your quality of life is prudent, as long as you can afford it.

While some level of lifestyle inflation may be unavoidable, remember that every spending decision you make today affects your financial situation tomorrow. Even with a substantial pay increase, it is possible to end up living paycheck to paycheck, just like you did when you were earning less money. This is because the increased spending that results from lifestyle inflation can quickly become a habit, the more you earn, the more you are likely to spend. You may buy more things than you need just to adjust to a higher standard of living.

Everyone is susceptible to lifestyle inflation to some degree but if you let it happen too fast, or let it go too far, it can adversely affect the amount of income that you can put towards securing your financial future.

So how do you make sure you do not become a victim of lifestyle demands?

Separating Wants and Needs

Assume you splurged and bought a smartphone worth Ksh.100,000 when you were 25 years old. Imagine if you had invested that amount instead to earn you a net return of just 8% per annum; by 45 years, your Ksh.100,000 would be worth Ksh.466,096.

While some purchases are necessary, it always pays to separate needs from wants. Keeping needs and wants in mind and making realistic, honest assessments about whether a potential purchase is a need or a want will help you make better financial decisions and avoid excessive lifestyle inflation.


To keep lifestyle inflation under control, you must draw up a budget and stick to it religiously. You need to assess your lifestyle objectively and see whether you can improve your savings rate. Budgeting also tells you if you are living beyond your means and how you can bring down your expenses to fit your income. Financial prudence demands that one should live within one’s means in order to live a comfortable life.

In addition, it is not wise to immediately upgrade your lifestyle after a pay rise, to the point where all the increase in pay is spent on consumption. The prudent approach would be to treat the increase in pay as extra income and always learn to save more than you spend from it. Give yourself time to identify the things you can afford on a sustainable basis. Budgeting also instills financial discipline ensuring that your savings and investments will automatically keep pace with your income. Most people invest what is left after their expenses. You need to change this mindset to spending what is left after investment.

Bottom Line

While most people raise eyebrows for ‘low’ inflation rates reported, they often forget that the rise in their expenses is also due to the changes in their lifestyles. Lifestyle inflation creeps up slowly without you realizing it. If it is not managed properly, it can wreak havoc on your finances over time. The problem arises when people go overboard with lifestyle expenses.

There are enough examples of people splurging after a pay rise, only to realize later that the increment was not big enough to sustain such a lifestyle. The rule of thumb while upgrading your standard of living is that you should be able to afford it on a sustainable basis, in other words, a greater portion of the extra income should be saved than spent.

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