Lifestyle inflation is, simply speaking, the human tendency to increase your spending along with increases in your income.
Promotion with a massive raise? Move to a fancier home, buy a fancier car, splurge on fancier clothes…
Some economists argue that increased consumer spending causes higher corporate profits, which tends to push up asset prices.
These days, with both stock market valuations and real estate prices going through the proverbial roof, the wealth effect is coming after your FI hopes with a vengeance.
The thing that makes the wealth effect even more dangerous to your FI than lifestyle inflation is that you increase your spending even though your income and fixed costs aren’t changing. You’re counting on paper profits to comfort you so you don’t feel guilty about spending more than your budget can afford.
Conquer the Wealth Effect if You Want to Ever Achieve Financial Independence