What is meant by "lifestyle inflation"?

Lifestyle inflation refers to the phenomenon where individuals increase their spending as their income increases. This behavior often leads to a gradual rise in expenses that corresponds with salary hikes or bonuses, resulting in a tendency to maintain a higher standard of living that can become habitual.

While it's normal to enjoy the fruits of one's labor, overspending as income rises can prevent effective financial planning and saving for future goals. This can inhibit long-term financial stability and wealth accumulation, as increased spending can lead to a lack of savings or investments. It's essential to recognize lifestyle inflation to avoid the trap of living paycheck to paycheck, even with a higher income. By understanding this concept, individuals can better manage their finances and resist the urge to inflate their expenses alongside their earnings.