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How 'lifestyle inflation' is holding people back from getting ahead

Some folks can never get ahead and part of their problem might be "lifestyle inflation."

Investopedia defines lifestyle inflation as "increasing your spending when your income goes up."

Instead of applying that extra money to paying down debt or to saving more for retirement, some people spend the added income on their lifestyle: "Lifestyle inflation is what causes people to get stuck in the rat race of working just to pay the bills," Investopedia explains.

Miranda Marquit wrote at Free From Broke that lifestyle inflation can "destroy all of the benefits that come with a higher income."

How?

"Often, lifestyle inflation manifests itself in eating out more, buying more things, and 'upgrading' various belongings, from the furniture to the car to the types of clothes you wear," she wrote. "Lifestyle inflation might also include experiences that you now feel that you can afford, from trips to the spa, to more expensive vacations, to costly gym memberships."

Marquit refers to an article in The Atlantic that found the percentages of income going to various categories stays about the same regardless of how much people make.

"I was surprised at how similar the spending across various categories is, regardless of income," she wrote. "When you consider the data, the indication is that many Americans aren't saving money when they see an increase in income; instead, they are likely to spend it by purchasing bigger houses and nicer cars."

Erin Lowry at AOL's DailyFinance talked with 26-year-old Michelle who remembers her first real paycheck after college.

"That paycheck was like candy to me," Michelle told Lowry. "I basically bought out The Limited for a whole new wardrobe. I went out for a big celebration dinner. I bought bottles of champagne. I treated my friends. And then I instantly regretted everything."

Lowry wrote that most lifestyle inflation is a choice: "And by choosing wisely, we can set ourselves up for financial success even when our expenses increase or an emergency arises."

Jonathan Ping at My Money Blog gave advice on how to avoid the trap of lifestyle inflation:

1. "Put saving first." If you get a raise, increase your contribution into your 401(k).

2. "Put debt last." Just because you make more doesn't mean you should borrow more.

Ping also recommended getting an affordable house and car and to try to live off one income even if a household is making two incomes.

Kate Furlong at Manilla.com said lifestyle inflation is one of the "fastest ways to destroy your chances of wealth."

She said having financial goals will help people keep on track and to ignore their neighbors' home renovations, new cars, etc.

One of the best ways to curb lifestyle inflation, Furlong said, is to "ignore your next raise." This can be done by transferring the full extra amount to savings or using it exclusively to pay down debt.

"You'll get the benefit of a higher income in that you'll be saving more and you won't inadvertently up your expenses by more than you've increased your salary," Furlong said.

Email: mdegroote@deseretnews.com Twitter: @degroote