Lifestyle Inflation: How to Earn More, Spend More, and Get Nowhere

Multi-ethnic bachelorette party toasting with champagne
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After the graduation caps are tossed in the air and the realities of impending student-loan bills sink in, millennials (we hope) scurry off to the rat race. Many fresh-faced college grads are receiving their first paychecks above minimum wage and -- at the same time -- their introduction to lifestyle inflation.

In the simplest terms, lifestyle inflation is the practice of increasing your spending in correlation with a higher income -- and frequently, spending all of that new income, or more.

Lifestyle inflation in high school meant using every cent of your pitiful paychecks from Applebee's to buy spaghetti-strap tops, go to the movies, and fill up the tank in the old clunker you shared with your three siblings.

In post-collegiate life, a starting salary of -- let's say $30,000 -- can offer a drastic increase in spending power from those days of filling orders for boneless buffalo wings.

Unfortunately, for those who funded college with student loans or took advantage of easy, pre-approved credit card applications (pre-credit card reform) -- that $30,000 seems to disappear all too easily.

The Voice of Reason

When Nick Rovisa was in school, he relied on credit cards for necessities like groceries and textbooks. "I also used it for things I just had to have at the time," he says, "like an Xbox 360."

Now 28, Rovisa, a digital professional working in New York City, says the seemingly unlimited cash he had on hand was exciting. "But thankfully," he adds, "I did always have a voice of reason in the back of my mind, which kept me from spending like crazy."

Rovisa graduated from college in 2008 and worked for a few startup companies before landing a salaried job that provided him with what he considered a "real paycheck." In those early years out of college, he took some time before acknowledging his debt.

"I always knew I had racked up debt," he says, "but didn't realize I was actually in debt until then. That's when I wised up and began taking control of my finances."

Other millennials are stunned when their lifestyle expectations don't match up with their first jobs out of college -- even if they picked a major with a low ROI.

Spend and Regret

"I always imagined that my first paycheck would be so much more," says Michelle, a 26-year-old Chicago-based university academic. "I was looking for that magic-bullet job that would pay me for the lifestyle I thought I had deserved -- even though I knew all too well what a teacher's salary would be like when I got my degree."

Even though her first paycheck was lower than she'd anticipated, Michelle warmly embraced lifestyle inflation.

%VIRTUAL-WSSCourseInline-884%"That paycheck was like candy to me," she says. "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."

Even with the taste of regret in her mouth, Michelle continued to inflate her lifestyle with a more expensive apartment, new clothes and a pricey gym membership.

"I told myself I deserved it after a year of living with such limited pay," she says. "Living in Chicago, I see girls my age who live such a free and stylish life. I wanted to pretend that I could be like that -- debt and all. I just figured everyone carried a card with a $3,000 balance."

On the eve of her wedding, Michelle calculated the combined debt she would share with her soon-to-be husband. The next day, the two made a pact to begin the process of climbing out of their financial hole by setting a budget and adjusting their lifestyle downward to live within their means.

Michelle now keeps herself accountable and chronicles the journey on her blog, Fit Is the New Poor.

Adjusting to Her Not-So-Dreamy Income

Like Rovisa and Michelle, my first job out of college (in entertainment) paid much less than I'd dreamed of as a doe-eyed undergrad.

To subsidize my salary, I picked up a second job (which required me to don a green apron every day and ask my customers if they wanted their drinks in a tall, grande or venti cup). I reverted to living like a college student and subsisting off expired bistro boxes, breakfast sandwiches, paninis and pastries.

It's a miracle my heart didn't burst from all the sodium.

By the following summer, I'd found full-time, salaried employment -- with benefits.

That year of financial struggle taught me the importance of "paying myself first" by committing a percentage of each paycheck to my savings account. I took advantage of my employer's 401(k) offering, as well as the pre-tax mass-transit card.

But even though I had dodged the obvious overspending traps, I experienced a lifestyle inflation problem a year later, when increases in Social Security taxes, public transit costs and rent took an extra $118 a month out of my pocket. In other words, I was suddenly living beyond my means as a result of actual inflation in my fundamental living expenses. Fortunately, I could adjust my budget to avoid debt and continue to save after inflation.

To prepare for potential budgeting troubles that are beyond our control, it's critical to live below our means and pay off our debts. Most lifestyle inflation is a matter of choice, and by choosing wisely, we can set ourselves up for financial success even when our expenses increase or an emergency arises.

And trust me: Living in the black feels a lot better than buying one more cute spaghetti-strap top.

Erin Lowry writes for DailyFinance on issues relating to millennials, money and personal finance. She's also the blogger behind Broke Millennial, where her sarcastic sense of humor entertains and educates her peers. Visit her there or follow her on Twitter, @BrokeMillennial.