Avoiding Lifestyle Inflation: How to Save More as You Earn More

Raise your hand if this sounds familiar: You get a raise or land a higher-paying job, and suddenly you’re eyeing that nicer apartment, trading in your car for a newer model, or upgrading your wardrobe. It feels good to treat yourself, right? But here’s the catch—when your spending grows alongside your income, you’re falling into the trap of lifestyle inflation. And while it might feel like progress, it’s actually one of the biggest barriers to building real wealth.

In The Psychology of Money, Morgan Housel dives deep into why lifestyle inflation is so tempting—and how avoiding it can set you on the path to financial freedom. Through real-life stories and sharp insights, he shows us that true financial success isn’t about earning more; it’s about keeping more of what you earn. Let’s unpack this idea with anecdotes from the book and explore how you can save more as you earn more.

What Is Lifestyle Inflation, and Why Does It Happen?

Lifestyle inflation is the tendency to increase your spending as your income rises. It’s not inherently bad—after all, there’s nothing wrong with enjoying the fruits of your labor. The problem arises when every pay bump leads to bigger expenses, leaving you no better off financially than before.

Housel explains that humans are wired to adapt. When we experience a jump in income, our baseline expectations shift. Suddenly, the things we once considered luxuries (like dining out or traveling) become necessities. This cycle can leave us stuck on a treadmill, always chasing the next level of comfort without ever building wealth.

Take the example of two professionals: one who earns $50,000 and spends $40,000, and another who earns $200,000 but spends $190,000. Who’s better off? The first person has $10,000 left to save or invest, while the second is barely scraping by despite their higher income. As Housel puts it, “Wealth is what you don’t see.” True financial success isn’t about appearances—it’s about what you keep.

The Story of Ronald Read: Frugality Over Flashiness

One of the most inspiring examples in The Psychology of Money is the story of Ronald Read, a janitor who quietly amassed an $8 million fortune. Despite earning a modest income, Read avoided lifestyle inflation by living below his means and investing consistently. He drove an old truck, wore secondhand clothes, and kept his expenses low even as his investments grew.

Read’s story highlights a crucial lesson: you don’t need a high income to build wealth. What matters is how much of your income you save and invest. By resisting the urge to upgrade his lifestyle, Read created a massive gap between his earnings and spending—a gap he used to grow his wealth over decades.

This approach might sound boring, but it’s incredibly powerful. As Housel reminds us, “Savings without a plan is just deferred spending.” By channeling your savings into investments, you let compound interest work its magic and create lasting financial security.

The Trap of Keeping Up With the Joneses

One of the biggest drivers of lifestyle inflation is social comparison. Housel explains that humans are naturally competitive, and spending is one way we signal status or success. Whether it’s buying a bigger house, leasing a luxury car, or splurging on designer clothes, we often spend to keep up with—or impress—others.

But here’s the kicker: no matter how much you earn, there’s always someone with more. As Housel puts it, “The hardest financial skill is getting the goalpost to stop moving.” When we tie our self-worth to external markers of success, we set ourselves up for endless dissatisfaction—and overspending.

This phenomenon is especially dangerous in the age of social media, where curated highlight reels make it easy to compare our lives to others’. The result? We inflate our lifestyles to match unrealistic standards, sacrificing long-term wealth for short-term validation.

How to Avoid Lifestyle Inflation

So, how do you resist the pull of lifestyle inflation and save more as you earn more? Here are some practical tips inspired by Housel’s insights:

1. Automate Your Savings: Set up automatic transfers to savings and investment accounts before you have a chance to spend your extra income. This ensures consistency and removes the temptation to overspend.
2. Cap Your Lifestyle: Decide early on what kind of lifestyle you want to maintain and stick to it—even as your income grows. For example, if you’re comfortable living in a modest home, resist the urge to upgrade just because you can afford it.
3. Focus on Experiences, Not Stuff: Instead of spending on material possessions, prioritize experiences that bring lasting joy—like travel, learning new skills, or spending time with loved ones. These moments create memories, not debt.
4. Give Yourself a “Raise” Later: When you get a raise or bonus, delay upgrading your lifestyle by a few months. Use that time to adjust to your new income and decide whether the extra spending is truly necessary.
5. Track Your Progress: Regularly review your savings rate and net worth. Seeing tangible growth can motivate you to stay disciplined and avoid lifestyle creep.
6. Celebrate Small Wins: Reward yourself for financial milestones, but do it in ways that don’t derail your progress. For example, treat yourself to a nice dinner instead of a luxury purchase.

Why Saving More Matters

Saving more as you earn more isn’t just about building wealth—it’s about creating options. Every dollar you save gives you more freedom to take risks, pursue passions, or weather unexpected challenges. Housel emphasizes that true wealth isn’t about having a certain number in your bank account—it’s about having the ability to live life on your own terms.

For example, imagine two people: one who saves 50% of their income and another who saves 10%. The first person reaches financial independence much faster, regardless of their salary. They can retire earlier, start a business, or take extended time off to focus on personal goals. Meanwhile, the second person remains tied to their paycheck, even if they earn more.

This highlights a key takeaway: the more you save, the less you need to rely on your income. And the less you rely on your income, the more control you have over your life.

Final Thoughts: Building Wealth Without Sacrificing Joy

At the end of the day, avoiding lifestyle inflation isn’t about depriving yourself—it’s about prioritizing what truly matters. By saving more as you earn more, you’re not just building wealth; you’re creating freedom, security, and peace of mind.

As Morgan Housel reminds us, “Doing well with money has little to do with how smart you are and a lot to do with how you behave.” By resisting the urge to inflate your lifestyle, you’re setting yourself up for a lifetime of smarter decisions and better outcomes.

So, ask yourself:

• Am I using my extra income to build wealth, or am I letting lifestyle inflation eat it up?
• What steps can I take today to automate my savings and cap my lifestyle?
• How can I align my spending with my values and long-term goals?

By committing to these habits, you’re not just changing your financial trajectory—you’re designing a life that’s richer in every sense of the word.

TL;DR: Avoiding Lifestyle Inflation

• Lifestyle inflation is the tendency to increase spending as income rises, leaving you no better off financially.
• Stories like Ronald Read’s show how living below your means and investing consistently can build wealth, even on a modest income.
• Social comparison and the desire to “keep up with the Joneses” often drive lifestyle inflation.
• Tips to avoid lifestyle inflation:
  • Automate savings and cap your lifestyle.
  • Focus on experiences over material possessions.
  • Delay upgrades and track your progress.
  • Celebrate small wins without overspending.
• Key takeaway: Saving more as you earn more creates financial freedom and allows you to live life on your own terms.