Lifestyle Inflation and How to Avoid it

A resident of Albany, New York, Michael Fish is an accomplished financial advisor with experience in helping both families and businesses achieve financial security. Since 2018, he has worked as a financial advisor and college unit director at Northwestern Mutual, a financial services company in Albany, New York. In this role, Michael Fish provides risk management, tax efficiency, estate preservation as well as wealth management and accumulation services. 

Accumulating wealth is a strategic process that requires careful planning and sufficient time. Wealth accumulation calls for deliberate effort and adjustment especially on lifestyle choices. Lifestyle inflation is one of the main impediments to wealth accumulation and this happens when you increase your expenses as your income increases. It’s common to want to upgrade your car or take a vacation as you may afford at the moment. However, if your saving is not at par with your rising expenses, it can leave you in a worse financial situation.

Many people don’t realize they’re engaging in lifestyle inflation as it’s not easy to detect. One effective strategy for avoiding lifestyle inflation is to automate your savings as it’s easy and tempting to spend cash lying idle in the bank. For instance, if your emergency fund is full and there are no immediate short-term goals that require savings, the extra funds can be automatically redirected to a brokerage account for investment purposes.

Furthermore, consider investing in brokerage accounts outside of the traditional retirement accounts such as 401(k) whose contribution limits remain the same with individuals whose incomes are significantly less than yours. Funds in brokerage accounts can be withdrawn if needed based on taxes and prevailing market rates but aren’t as accessible as funds in a cash account.