Have you ever felt your finances seem stuck in place, even as you earn more and move up in your career?

No matter how much more money you earn, you can’t seem to increase the amount you put away for a rainy day. This feeling is quite common and may be due to a pesky financial foe called Lifestyle Inflation, sometimes called lifestyle creep.

Lifestyle inflation can affect everyone, regardless of position and income.

In fact, I would venture to say that those on higher incomes can be more susceptible to the trap of lifestyle inflation, as having a higher income can give you a false sense of security, making it easier to spend more than you should.

For those of us living in big metropolitan centers like Tokyo, where wealth is concentrated and there are boundless opportunities to spend on goods and services, lifestyle inflation can affect our spending and lifestyle habits in subtle but significant ways, ultimately impacting future finances.

Understanding lifestyle inflation and its implications is crucial to keep it in check in one’s own life.

What is Lifestyle Inflation?

Lifestyle inflation refers to increasing your spending habits as you increase your earnings. Basically, the more you earn, the more you spend.

Thus, you are trapped in a never-ending spinning wheel of expenses, with little left over for things like saving for an emergency fund, paying down existing debt, and important future considerations like retirement savings.

Lifestyle inflation can manifest in various ways, often disguised as reasonable upgrades or rewards for hard work.

Here are some common examples of how lifestyle inflation can creep into one’s life in Japan:

• Splurging on luxury items because “you deserve it.”
• Upgrading to a more expensive apartment in a trendier neighborhood.
• Dining out more frequently at upscale restaurants.
• Increasing spending on leisure activities such as travel and entertainment.
• Acquiring expensive gadgets or vehicles to match your new perceived status.

While these indulgences may seem harmless individually, collectively, they can lead to financial strain and hinder long-term wealth accumulation.

In fact, one of the worst aspects of lifestyle creep is that it tends to go unnoticed; for this reason, it is often referred to as “silent inflation.” It is not until the damage has been done that one realizes that no additional money is being saved due to higher expenses.

To make matters worse, by the time you notice that you fell into the lifestyle creep trap, you may already have gotten used to your new, more expensive lifestyle and already committed to ongoing payments such as higher rent, higher car payments, etc.

Getting used to a better lifestyle is easy. Adjusting to a less luxurious lifestyle is not.

Combatting Lifestyle Inflation

So, what can one do to deal with lifestyle inflation? Combatting lifestyle inflation requires deliberate effort and conscious decision-making. Here are five effective strategies to keep lifestyle inflation in check:

1. Become Aware and Take Control: The first step in combating lifestyle inflation is awareness. Understanding lifestyle inflation will help you spot it before it can take hold. Recognize the signs of creeping expenses and actively monitor your spending habits. Regularly review your budget and assess whether your spending aligns with your financial goals. By staying vigilant, you can make informed decisions and control your finances.
2. Mind the Risks of Increased Income: While higher income may seem like a cause for celebration, it’s essential to be mindful of the associated risks. Just because you suddenly find yourself flush with cash does not always mean your new monetary abundance will continue. This is especially true if a significant part of your income is performance-based, and/or subject to market fluctuations. If you are working in professions such as finance or recruitment, for example, sudden downturns or shifts in your industry can quickly erode newfound higher incomes and cause problems. The risk is also higher if the household relies primarily on one income, as the loss of that income can have a greater effect on the family finances. Diversifying income sources and maintaining a balanced financial approach can mitigate these risks.
3. Live Below Your Means: Adopting a lifestyle below your current income level can serve as a buffer against lifestyle inflation. Living as if you are earning less than you do will lead to a less stressful life and healthier finances. It will also give you a bigger buffer should the situation change. Prioritize long-term financial security rather than succumbing to the temptation of immediate gratification. Save and invest the difference between your income and perceived lifestyle requirements. This disciplined approach allows for essential goals like retirement planning and emergency savings. We consistently see that within our clients, those who live below their means have much healthier finances (regardless of their income levels) and, as a result, a lot more freedom and flexibility to change or adjust their lives.
   
4. Avoid Comparison and Peer Pressure: In cities like Tokyo, where opulence is prevalent, it’s easy to fall into the comparison trap. No matter how good you have it, there will always be someone with a higher-paying job, a bigger apartment, a more expensive bag, a more luxurious car, etc. Resist the urge to keep up with extravagant lifestyles showcased by peers and colleagues. Focus on defining your own values and financial priorities rather than succumbing to external pressures. Remember, true wealth is measured by financial freedom, peace of mind, and having the ability to do the things that make you happy.
5. Be mindful of the Inhabitance Tax, or “Ku Tax” in Japan: Did you just have a huge raise at work? Or perhaps you earned a massive performance bonus, which will increase your earnings significantly? While earning more money is always good, you must be mindful that your taxes will also increase in Japan. One thing that people sometimes forget about is the Inhabitance Tax, and this is because you will not see the increase until the following year, as it is based on your income from the previous tax year. In Japan, the Inhabitance Tax is 10% of your income, so you should plan for this so you don’t get caught out the following year.
6. Plan for Income Fluctuations: Recognize that income levels are not static and will fluctuate over time. Statistically, peak earning years typically occur in one’s 40s and 50s. Therefore, planning for income variability is prudent when making significant financial commitments, such as buying a house and paying education expenses. On that last point, if you have kids in Tokyo, you likely understand how expensive that can be as an expat. Spending more on your kids’ education costs as you earn more is a common affliction in Tokyo. Adopt a flexible budgeting approach that accounts for potential income fluctuations and adjusts spending accordingly.

Seeking Financial Guidance

Ready to take control of your finances and your future goals? Speaking to a financial adviser can help you gain an objective perspective on your current situation and start on a path toward financial freedom.

At Argentum, we understand the unique financial challenges expatriates living and working in Japan face. Our wealth management services cater to the diverse needs of the international community, offering personalized advice and investment solutions tailored to your goals. Contact us for a free consultation today.