Buzz
Here’s an unexpected way lifestyle inflation sneaks in: through your home’s equity. Research shows that as your home’s value rises, so does your spending tendency, often without you even noticing.
The Wall Street Journal refers to this as a blind spot, pointing to a 2013 study published in the Review of Economics and Statistics. They explain:
Many individuals tend to spend more when their assets, especially property, increase in value, even though these assets typically won't boost their spending power in the long term. Specifically, for every $1 rise in home value, certain households increased their consumption by six to eighteen cents.
It’s somewhat logical when you consider it. Seeing your home’s value climb by thousands of dollars makes you feel wealthier, and as your net worth grows, you’re more likely to indulge financially. You’re richer!
But it’s not that straightforward. To access that money, you would need to sell the home (or borrow against it). And as Federal Reserve economist Daniel Cooper points out, you’d likely pay the same price for a home in the same market. So, in reality, you’re not wealthier unless you downsize. Your purchasing power remains unchanged.
Of course, you have the freedom to spend your money however you wish, but it’s important to do so mindfully. Otherwise, lifestyle inflation can take over and lead to living beyond your means. Cooper offers one last piece of advice:
Moreover, people should not view a home as a means to borrow more money. “If you max out your home-equity line of credit and then housing prices fluctuate, there’s a good chance you’ll find yourself in a financially tight spot.”
This is something to remember if you own a home. Be sure to read the full article at the link below.
Photo by Tax Credits.
