Guard yourself against lifestyle inflation with the 40/40/15/5 rule

by | Aug 26, 2013 | Money

Takeaway: To combat lifestyle inflation, know how you’ll allocate each additional dollar you make ahead of time. The combination that’s worked for me: 40% for paying off debt, 40% toward savings and investments, 15% for extra spending money, and 5% for charity.

Estimated Reading Time: 1 minutes, 31s.

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After your income increases, it’s difficult to resist the temptation to use your extra spending money to increase your standard of living (“lifestyle inflation”). I’ve had the chance to watch my income rise and fall throughout University as I transitioned in and out of co-op terms and part-time jobs, and have seen first-hand that if you don’t have a plan to combat lifestyle inflation, you’re not going to save more as you earn more.

coinstackThe problem with lifestyle inflation is that you get used to the things you have. So, as you get more things, you get used to those things too, and having more things becomes your new “normal”. Numerous studies have shown that people settle into the same level of happiness after the initial excitement of buying new things wears off, so no matter how many things you have (provided you have what you need), you always settle into the same level of happiness.1

If that makes sense.

To prevent lifestyle inflation for myself, I use a rule that I call the “40/40/15/5 Rule”. (Yes, I know that’s a crappy name, but the concept behind it really works.) The crux of the rule is that you define how you will allocate each additional dollar of your income before your income actually goes up.

Personally, for every additional dollar I make, the rule I have is I allocate:

  • 40% for paying off student debt
  • 40% for contributing to savings and investments
  • 15% for extra spending money
  • 5% for charity

Though your breakdown might be (and should be) different, depending on your values, goals, and so on. And if you don’t have student loans like I do, I guarantee your breakdown will be different.

It’s easy to fall into a trap of buying more things as you earn more money, but it’s so much more rewarding to use your extra money to invest in your future, while spending only a part of that money on increasing your spending levels. In the long run, lifestyle inflation won’t make you happier, but looking out for your future self today will.


  1. Source: http://en.wikipedia.org/wiki/Hedonic_treadmill 

Written by Chris Bailey

Chris Bailey has written hundreds of articles on the subject of productivity and is the author of two books: Hyperfocus and The Productivity Project. His books have been published in 27 languages. Chris writes about productivity on this site and speaks to organizations around the globe on how they can become more productive without hating the process.

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