The slippery slope of lifestyle creep and how to avoid it.
As you progress in your career, get promoted, and change jobs, you’ll make more money along the way. As you reach new milestones in life — marriage, family, a new home, a new car, and saving for college and retirement — you’ll have more options for how to spend that money. In due course, do you find yourself relying on credit cards for regular expenses or having trouble saving money? If so, then lifestyle creep might be the elephant in the room. Lifestyle creep is fine within reason, but remember: it’s hard to throw it in reverse. It’s a surefire way to lose your financial perspective and footing.
Lifestyle creep, otherwise known as lifestyle inflation, refers to increased spending after receiving a raise or getting a higher-paying job. It happens when your standard of living rises alongside your discretionary income, and as soon as you can afford yesterday’s luxuries, they become today’s perceived necessities. It tends to be insidious and happens little by little, without you really realizing it — it sneaks up on you. So, it can be difficult to realize it is occurring. That is why is some experts have called it a “silent inflation.”
It might have started with buying yourself the latest gadget when you scored a pay rise, and before you know it, you’ve upgraded your car. It’s not just upgraded your car. It’s not just big expenses like an expensive car or a second home — it could be smaller things like paying for a gym membership you don’t use; filling up your closet with so much stuff that it becomes overwhelming; buying things you don’t really enjoy; buying video games you don’t play or media you don’t watch; sinking so much money into a hobby that it doesn’t feel worth it anymore, eating out more often; or going from one streaming service to three. All these little extra expenses can start to add up.
An individual’s discretionary income could increase as a result of either increased income or decreased costs, such as paying off a mortgage where the money you were putting towards your repayments is now ‘spare’ cash. As discretionary income increases, individuals are able to spend money on things that were previously unaffordable. Lifestyle creep occurs when spending increases at the same rate as income.
The downside of this creep is that when your income decreases — such as with unemployment or in retirement — you might run out of savings as you continue this lifestyle.
WHO IS MOST AT RISK FROM LIFESTYLE CREEP?
Lifestyle Creep and Younger Savers:
This phenomenon is common among young adults in their mid-twenties to early thirties. In this age group, rapid career advancements lead to more discretionary income, which can result in excess spending. Reasons also include a spender’s need to project a certain image and social status to others, thus buying expensive gadgets and items just to fit in. At some point, you might have told yourself that you can’t save now because you’re starting your career and that you’ll save more when you make more. We put off saving today and instead defer it until tomorrow. But the cycle simply repeats itself.
You don’t want to wake up one day in a haze, realize you have a ton of credit card debt, and be unable to recall how or when you spent all of your hard-earned money. This is exactly why you need to curb your lifestyle creep before it gets out of control.
Lifestyle Creep and Near-Retirees:
Five to ten years prior to retirement, you’re probably in your peak earning years; your debt is likely to be on the lower end, and, with any luck, your children are more or less financially independent. With this new discretionary income, your standard of living may inch up without you realizing it. You might go for a more expensive vehicle or a pricier vacation without thinking about why. When you retire and try to maintain a formerly lavish lifestyle, you can suffer financially. Furthermore, it is challenging to downgrade your lifestyle.
Since one goal in retirement is to maintain the lifestyle one has become accustomed to in the years preceding it, a retiree who has experienced lifestyle creep may require more funds to support their new lifestyle. They might find that they lack the resources to do this because they have spent their surplus cash flow, rather than saved it for retirement.
One drastic downside is finding yourself in a state of financial fragility, which makes you vulnerable to financial shocks. Shocks happen all the time, without warning, and they come in all shapes and sizes. When a shock occurs to someone in a financially fragile state, their options are narrowed, and they become vulnerable to financial stress and uncertainty.
THE FIX:
Take note of your wants and needs. Being able to distinguish between the two can be difficult, but it will prove to be a very worthwhile skill when you can walk away from the temptation of an impulse purchase you really don’t need.
Be aware of EMOTIONAL SPENDING. Have you ever made an emotional purchase or regretted buying something? Buyer’s remorse can be a sign that lifestyle creep may eventually pop up — especially if it happens more than once.
Prioritize Value Over “Things”:
Have you ever bought something you always wanted only to find it didn’t really make you happier? Nicer things are okay, but they often aren’t the things that bring lasting happiness. Increased happiness comes when you align your money with what you value and the life you want for yourself and your family.
Keeping Up with the Joneses:
The impulse to match your spending with a friend or neighbor who appears more well-off than you is perhaps the most dangerous form of lifestyle creep. It can compel you to spend more — even when you may not have the financial means to do so.
Note the key term here is apparently. Because without seeing your friend or neighbor’s bank statements, you have no way of knowing whether their material prosperity is real or merely a debt-fueled illusion. So, trying to match them splurge for splurge may only succeed in leading two households down the lonely road to financial distress — rather than just one.
Now the Paycheck, New YOU! Hold on there! When you receive a bump in your paycheck, it’s tempting to immediately upgrade your lifestyle. This lifestyle inflation can be a silent wealth drainer. Elevating your spending habits with every increase in income can lead to a cycle where you’re constantly chasing greater comforts — often at the expense of savings and investments. It’s important to remember that financial stability isn’t solely about how much you earn, but also how wisely you spend.
When you get a raise, buy a little bit of peace of mind rather than indulging in short-term luxuries. Seek the balance between investing in your secure future and enjoying an abundant present. One rule of thumb is to save 75 percent of every increase in salary or pay until you are able to save at least 20 percent of your take-home pay annually.
Inflation naturally causes the cost of living to increase, and you should be able to enjoy a higher standard of living over time if you’ve earned it — but don’t forget to save for the future.
EMERGENCY FUND: YOUR FINANCIAL FOUNDATION:
An emergency fund is like an umbrella on a sunny day: you might not need it now, but when the unexpected storm hits, you’ll be grateful you have it. It protects you from life’s unpredictable rain showers — be it job loss, medical emergencies, or urgent repairs. Aim to save a solid six month’s worth of living expenses, ensuring you remain sheltered and dry during financial downpours. This buffer not only provides peace of mind but also secures your future, preventing the need to dip into long-term investments or incur high-interest debt during emergencies.
HAVE A FINANCIAL PLAN:
Have you ever made a purchase and then realized there were other expenses you didn’t account for? That bigger house means more furniture, higher utility bills, more maintenance, higher insurance premiums, and more taxes. The “extras” can add up and need to be part of your plan before you sign the loan papers. Have you made purchases, big or small, without thinking about how they affect other areas of your life? Without a plan, it’s hard to see how new expenses impact the rest of your financial landscape. As expenses add up, they can eat into your ability to save for key life milestones, such as marriage, kids, college, a home, and retirement.
Lifestyle creep isn’t just just spending more when you make more — it’s spending more without a plan and without understanding how your expenses affect the rest of your life. To avoid it, you need a financial plan — one that looks at all facets of your life, both now and in the near future.
A personalized plan will help you weigh all your options, make smarter decisions, and put you in control of the life you want for yourself and your family. It will allow you to save for a rainy day or that next important purchase, and invest for the future ahead. The only way to understand and change how you spend your money is to track how and when you spend it.
Making and keeping a budget is the first thing you can do to ensure that your spending stays in check while your income grows. The best way to avoid lifestyle creep, live the life you want, and save for your financial independence is to make ongoing financial planning a priority.
ALLOW YOURSELF OCCASSIONAL INDULGENCES:
It’s a mistake to restrict your spending to the point that you can never splurge. So, allow for these type of things on special occasions. But avoid eating out frequently — on average, it’s almost five times more expensive to order restaurant delivery than it is to cook food at home.
THE BOTTOM LINE — BE MINDFUL OF YOUR SPENDING. ARE YOU ENJOYING IT? OR IS IT CREEPING UP ON YOU?
