Avoiding Lifestyle Inflation: Tips from a Financial Advisor

When individuals experience an increase in income, it is a prevalent scenario to feel entitled to indulge in more luxurious experiences, such as acquiring a new vehicle, embarking on extravagant vacations, or acquiring a larger residence. While the prospect of having additional funds to splurge may seem favourable on the surface, it can also result in a phenomenon termed as “lifestyle inflation.” This term refers to the propensity to escalate spending as one’s income expands, and it can pose a significant challenge to circumvent due to its gradual nature.

As indicated by Ryan Viktorin, Vice President and Financial Consultant at Fidelity, lifestyle inflation is a prevalent concern amongst clients who are striving to abide by a budget, attain financial autonomy, or retire early. During periods of economic instability, such as inflation and fluctuations in the market, these apprehensions may be exacerbated.

Viktorin cautions that lifestyle inflation has the potential to derail one’s financial stability, thereby obstructing the adherence to a budget and the achievement of financial objectives, particularly if the objective involves saving for the future. The seemingly inconsequential additional expenditures performed regularly have the capacity to accumulate over time, ultimately detracting from prospective interest income and more substantial savings aspirations.

So, what measures can one take to evade the pitfalls of lifestyle inflation? According to Viktorin, the crucial solution is to remain conscious of one’s spending habits. Even if one does not favour strict budgetary limitations, having a general comprehension of the disparity between income and spending can facilitate the pursuance of financial targets and act as a warning when lifestyle expansion is taking root.

Fidelity additionally offers an application to aid clients in the management of their spending practices and the cultivation of sound financial behaviours. Viktorin underscores the significance of establishing financial objectives as the bedrock of any financial strategy or budget. She recommends the establishment of achievable milestones to commemorate one’s journey, as this approach fosters motivation and adherence to the outlined plan.

With the onset of the new year, Viktorin urges individuals to contemplate the establishment of fresh financial goals and practices. She advocates commencing with the formulation of a financial plan tailored to both immediate and long-term aspirations. This need not be an all-or-nothing endeavour; the progression towards the set milestones, no matter how minute, is indicative of moving in the right direction. Furthermore, conducting an evaluation of recurring subscriptions and commonplace expenses can guide the identification of areas where reductions can be made, subsequently permitting the allocation of funds towards saving and investment.

Viktorin suggests utilising an application such as Fidelity Bloom to garner insights into spending habits and adopt a more attentive approach to financial management in the new year. While the notion of planning and budgeting may appear daunting, it need not be insurmountable. Understanding the rationale behind one’s purchases is a pivotal initial step in establishing a more robust relationship with one’s finances.