How To Avoid Lifestyle Inflation

Estimated reading time: 8 minutes

Lifestyle inflation is known as spending more money as your income increases.

You may also have heard the term “lifestyle creep,” which is the same thing.

When income creeps up, so does the lifestyle, which has inherent issues for many Canadians.

During my ten years of blogging, I’ve stood by the “It’s Not About How Much Money You Make; it’s How You Save it.”

As interest rates rise with the Bank of Canada, many Canadians will feel the punch from gas to groceries.

If you aren’t using a budget, it might be wise to set one up. (You can use my free Excel or paper budget) or find a free mobile app.

Today, let’s talk about lifestyle inflation, interest rates, and how to avoid falling into a debt trap.

How To Void Lifestyle Inflation - Prada UK
How To Void Lifestyle Inflation – Prada UK

Why Interest Rates Attempt To Combat Inflation

Interest rates attempt to combat inflation to try and tame consumer spending.

When interest rates increase, consumers are less likely to buy something at an inflated cost.

The problem is that some of the stuff suffering from inflation is stuff we need.

Examples are gas, energy, and food, which impact how much one can afford.

When interest rates are low, Canadians borrow and spend money, boosting the economy.

For example, it’s easier to fund a more extensive mortgage when interest rates are low.

Unfortunately, interest rates aren’t going to stay low forever.

While paying off our house, we weren’t the risky investors we are today with our retirement savings.

Today, a 5-year fixed mortgage with CIBC is 4.59%, whereas it is 4.39% at Meridian.

These rates are still low compared to the ’80s when rates hit 18% plus.

I’m not sure if the 90s were any better than the 80s.

At lowestrates.ca, they have a nifty online calculator, so I plugged in some numbers.

  • House in Ontario
  • $500,000
  • $50,000 down payment, 10%
  • Lowest Mortgage Rate is 3.79%
  • 5-year fixed rate

So, Ontario still has lower interest rates for people who prefer a fixed mortgage.

One tip I will throw in here is not to spend more than you can handle, whether on credit or obtaining a mortgage.

When your term is over, and you have to renew if interest rates are higher, can you still afford the payments?

Remember that if interest rates go up, so will everything else.

Consider this before stepping into the home buyer’s mode while interest rates are low.

Bank Of Canada Hikes Interest Rates

Today, the government will announce new interest rate hikes to slow down the economy.

Many people are getting over their heads with house prices listed so high.

When inflation rates are high, the Bank of Canada will hike the interest rate to slow down the economy.

Experts predict the Bank of Canada will likely announce another major interest rate boost Wednesday as it tries to rein in runaway inflation.

After keeping its key interest rate near zero since March 2020, the central bank unveiled a pair of rate hikes in March and April – the second was by half a percentage point, the largest in 22 years.

Source

However, the Bank of Canada will lower the rates when the economy slumps.

Please don’t count on that any time soon, as it’s been so low that people have forgotten to pay interest.

I think there will be lots of Canadians struggling as the rates increase.

This week, interest rates are expected to increase by another half of a percentage point, bringing it to 1.5%.

Canada’s consumer price index rose 6.8 per cent in April compared to a year earlier, Statistics Canada reported earlier this month.

Groceries jumped 9.7 per cent – the largest increase since September 1981 – while gasoline prices were up 36.3 per cent year over year.

CTV News Business (see source link above)

Why Does Lifestyle Inflation Happen?

Gucci London London, England, UK - Canadian Budget Binder
Gucci London London, England, UK

Understanding how lifestyle inflation can get out of control doesn’t take much thinking.

Earn more = spend more, or lower interest rates = spend more.

Lifestyle inflation is a fantastic way to find yourself in debt when interest rates increase and job loss or health problems occur.

Yes, that was sarcasm, but it must not be overlooked whenever you purchase something on credit or take out a loan.

Lifestyle inflation happens for a variety of reasons. I’ve listed a few below to get your mind thinking.

Perhaps you’ve been in this situation already and know the feeling.

  • New Career Higher Pay
  • No Debt
  • Mortgage Free
  • Low-Interest Rates
  • Easier Lending
  • Credit Card availability
  • Employee Raise
  • Showing Off what you can’t afford

The hype behind the achievements can lead to living a lifestyle above your means.

The term “rolling with money” comes to mind when I think about spenders who spend without budgeting.

It’s impossible to build a savings portfolio for retirement, emergencies, or balance a budget when spending is a daily celebration.

I can understand how easy it would be to fall into a lifestyle inflation trap when all debt is paid.

Spending more money is easy with no more mortgage payments and zero debt.

I still believe that it’s fair game if you have no debt and pay yourself first by investing.

In saying that, you can spend more on a luxury item as long as you budget for it.

However, if you recently got a raise, still live at home, or rent but want to buy a house, don’t do it.

Lifestyle inflation is comparable to the revolving door of credit that will eventually catch you.

How To Avoid Lifestyle Inflation

Our situation has had some lifestyle inflation, mainly in the grocery shopping category.

Although we still have a monthly budget and meal plan, we can easily step off the grocery budget.

We also use Checkout51, Rakuten, PC Optimum, Coupons, Flash Food, Receipt Hog, and My Points to save on groceries.

Online shopping is the most challenging part of lifestyle inflation, although we put stops in.

For example, if our Amazon spending is becoming a habit, we slow it down.

Once set up in an online buying system such as Amazon Canada, it’s easy to click and checkout.

We like comparing shops online and not spending money on gas while getting free delivery.

Covid-19 Set The Stage For Increased Debt

Since the pandemic began in 2020, many Canadians have turned to online shopping so they don’t have to leave the house.

After two years of working from home and homeschooling, online shopping has become a lifestyle.

Should we stop online shopping? No, but setting boundaries is essential, starting with a budget.

I suggest that with any budget, you input the receipts right away.

Related: Why should Canadians always keep their receipts?

Doing so lets you quickly see how much money you’ve spent in each budget category.

For example, if you set aside $500 for groceries, the last week of the month, and you’ve already spent $450, you know there’s only $50 left.

With lifestyle inflation, you’ll see more significant overages if the person in charge of finances doesn’t have a budget.

You might not even see the overage if you’re not budgeting, but you’ll be left with little to no money to pay other bills.

This type of spending is someone who feels entitled to spend freely without consequences.

Remember, even lottery winners go broke.

What Are The Signs Of Lifestyle Inflation?

Although this generally sounds easy to figure out, not everyone can grasp it straight away.

  • Buying a new luxury car with high maintenance fees, repair fees, and premium petrol
  • Purchasing a home that is overpriced or without much thought to long-term concerns
  • Jetting away on holidays more than normal
  • Shopping for brand-name products and clothing that are costly.
  • Eating out at fancy restaurants or, in general, eating out too much
  • Credit card bills and other debts you’re only making minimum payments on
  • Anything purchased on a buy now pay later scheme

I’m sure we can all add to this list, and perhaps you can create one for your lifestyle.

Generally speaking, it’s buying stuff that you do not need.

If you’re struggling to make ends meet, find out where you’re spending money.

The only way to do this is by using a budget and reducing costs dragging you down.

How Do You Deflate Your Lifestyle?

I like this question because it resonates with so many people in debt.

It’s simple to avoid an inflated lifestyle, but deflating it takes commitment once you are in it.

As mentioned, it’s easy to fall into a debt trap when you allow lifestyle inflation to take the wheel.

You need to stop if you’re struggling to pay your credit card bills or apply for more credit cards.

Getting in over your head when it comes to playing the role of your new career, an income boost takes its toll.

Both men and women are equally guilty of spending more money than they earn to fit the role.

It’s also easy to blame shift who spends more money when there is no budget to prove so.

Nobody cares as much as you do how much money you have or don’t have.

If you go broke, you go broke.

The only way to deflate your lifestyle is to take back control of the unrealistic world you’ve created.

You don’t need a BMW or shop at Gucci to look successful.

Breaking The Cycle Of Lifestyle Inflation

Lifestyle inflation doesn’t happen to everyone, but if you are in a financial bind, perhaps these tips might guide you.

  • Write down your goals (start at one year and increase goals as debt reduces)
  • Communicate with your partner or spouse about finance.
  • Get a budget put in place.
  • Set bank notifications to your mobile phone to alert you of banking activity.
  • Automate your savings and investments.
  • Automate utility bills, mortgage, insurance, rental insurance, rent, property taxes, etc.
  • Use a meal planning guide for grocery shopping.
  • Only use a credit card if the rewards are more significant than cash, which you can pay in full.
  • Pay yourself first – Allowance and Investment savings.
  • Learn to say NO and spend time around friends who don’t need money to have a good time.

Overall, if you keep your financial health in good order, pay yourself first, and give yourself an allowance, you can build wealth while paying off debt.

Discussion: How do you combat lifestyle inflation? Have you ever been caught up in lifestyle inflation?

Please share your story in the comment section to help those struggling with nowhere to turn.

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4 Comments

  1. Great advice. I know a lot of people who do well, but their expenses rise at the same rate as their income (if not more). They are just as stressed as they were when they were making less money.

    It’s an easy trap to fall for. The best thing money can buy is peace of mind, so I definitely try to avoid lifestyle inflation as much as possible.

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