What effect can lifestyle inflation have on financial goals?

Lifestyle inflation refers to the tendency of individuals to increase their spending as their income rises. It can significantly impact financial goals by increasing overall expenses and reducing the ability to save or invest effectively. When individuals experience an increase in their income, they may feel compelled to upgrade their lifestyle—whether by purchasing a more expensive car, moving to a larger home, or indulging in more luxurious experiences.

This heightened level of spending can lead to a situation where the individual is unable to allocate sufficient funds toward savings or investments needed to reach their financial objectives, such as retirement savings, buying a home, or funding education. Consequently, the pressure to maintain or enhance one's lifestyle can create a cycle where increased income does not equate to increased financial security or achievement of financial goals. Instead, one's financial health can be compromised as cash flow is diverted toward maintaining an inflated lifestyle rather than building wealth.