Mo’ Money Mo’ Debt: How to Avoid Lifestyle Inflation

Lifestyle Inflation

It’s a song I spent a lot of time listening to in my 20s.  On the dance floor nobody could stop me when it came on… I’m comin’ out… You know “Mo’ Money Mo’ Problems,” by The Notorious B.I.G. Who knew at the time that I was shaking my booty to what would become a song that defined a generation of spenders. That was a decade before we would be heading into an unprecedented era of low rates, record amounts of borrowing and when the term “lifestyle inflation” would be a buzz word plaguing many Canadians.

What is Lifestyle Inflation?

Lifestyle inflation literally means the more money you make, the more money you spend. Rather than saving and paying down debt, we tend to spend any raise in salary. It could be a new car, a bigger house, or a luxury vacation.

It all becomes more doable when we start making more money. After all, you’ve earned it – why can’t you spend it?

Why You Should Avoid Amping Your Spending

The problem is if you give into lifestyle inflation, you reduce your financial security. Simply spending more delays big financial goals like being mortgage-free, having a healthy retirement nest egg, and not living paycheque to paycheque. We often hear about being caught up in the so-called “rat race.” Lifestyle inflation has created this phenomenon – and that can feel like you are on a hamster wheel.

Low Interest Rates, Mo’ Problems

The ability to borrow more has escalated the issue of lifestyle inflation. Ten years ago a million-dollar house was a price tag reserved for the ultra-rich. If you were spending seven figures on a home, you weren’t just buying house – you were buying mansion. But with average house prices in major centres like Vancouver and Toronto crossing that mark, it’s no longer hard to find young people willing to take on huge mortgages to get into their dream house. It’s not unusual to hear about mortgages in the $500-thousand + range. The problem is, if interest rates rise these mortgages will still be high at renewal. Even if you are left with $400,000 mortgage in five year’s time, if rates were to rise by say 3 percentage points, you would see your payments double overnight.

Take a Calculating Approach

You don’t need me to tell you that when you get a raise at work that paying down your debt and saving more for your future is the most prudent thing you can do. But many of us don’t do that. I encourage anyone to use a simple compound calculator to see the difference even a few hundred dollars a month in their savings will make when they retire. The same goes for your mortgage amortization – use a calculator to see how making only a few extra lump sum payments will reduce the life of their mortgage.

Also read: Canadians Are Reducing Their Retirement Savings Goals>

Happiness is About More Than Money

The Fraser institute recently published a report that says freedom – not money – is what makes us really happy. The report states, “If you live in a country where you can freely trade with others, choose your occupation, enter freely into business and keep more of what you earn, then you’re going to feel like you have control of your future which in turn is going to make you happier.” We already have that luxury in Canada, so take advantage of it and save more for your future. My best advice is increase your saving by the percentage your salary has, then you can spend the rest knowing you are not becoming a victim of lifestyle inflation.  Don’t let The Notorious B.I.G.’s song become your anthem: “The more money we come across with the more problems we see”.

Related Topics

Growing Your Money / Personal Finance / Personal Finance News / Saving For Retirement / Your Budget

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