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An increase to your income is one of the better feelings in life. A new raise, bonus, or decrease in expenses can lead to a euphoric feeling knowing you have more money to play with. But what do you do with that money?
Are you a person who takes that money to save, pay down debt, and invest more? Or do you treat yourself to nicer clothes, nicer dinners, and maybe a new car? If you fall into the latter group, you could be experiencing lifestyle creep.
WHAT IS LIFESTYLE CREEP?
Lifestyle creep, or lifestyle inflation, is when an individual’s standard of living increases as his or her discretionary income increases. The rise can come from an increase in income, a decrease in expenses, or a combination of both.
Rather than allocating excess discretionary income to savings or paying down debt, an individual may feel entitled to spend, or that they deserve to spend. One problem lies in the fact that expenses and spending from the new lifestyle can outpace the new level of income.
This is how you see wealthy people still living paycheck to paycheck. Items that were once luxuries or one-time things now seem essential to everyday life.
Treating yourself when you get a raise or a bonus is not the problem. The problem is when you consistently live an inflated lifestyle following that treat.
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EXAMPLES OF LIFESTYLE CREEP
Examples of lifestyle creep are everywhere. You can see it in the smallest behaviors such as not shopping for deals anymore or never packing your own lunch. They can also be large purchases like a luxury car.
The common thread is that one is spending in a way that is different that before the rise in income.
Here are a few examples:
- Increased frequency of eating out
- Eating higher-priced meals
- Purchasing designer fashion rather than modest clothing brands
- Flying premium rather than coach
- Purchasing a new house, car, boat, etc
- Always buying the latest technology
- Outsourcing tasks and paying for housekeeping, car washes, dry cleaning, etc
- Increasing subscriptions such as gym memberships and country clubs
CAUSES OF LIFESTYLE CREEP
The increase in discretionary income is not the root of the cause of lifestyle creep. That income enables lifestyle creep to happen.
Lifestyle creep seems to be a cultural acceptance. Our environment (in the US at least) has instilled in us that as we earn more, we should spend more. Our consumer-driven society wants us to spend money when we have it.
The crowd you surround yourself with can have a profound effect on if you buy into this culture. If you surround yourself with individuals who live lavishly, you will find yourself trying to “keep up with the Joneses” to fit in and impress.
However, if you grew up in a fiscally conservative household and have financially literate friends, you are less susceptible to lifestyle creep.
The Youth and the Aging
Lifestyle creep is often seen with young consumers and those nearing retirement.
Adults in their mid-twenties to early thirties are prone to lifestyle inflation because their career and income are advancing at the fastest pace they ever will. After living through college relatively broke, this acceleration of income can be disastrous if not managed.
Those approaching retirement can fall into lifestyle creep due to their stable financial situation. They are likely earning more than they ever have. They no longer have kids in the house. And they have paid off student loans and mortgages at this point.
Their income and savings accounts are high, while costs have been dropping. This recipe can encourage excess spending.
THE NEGATIVE EFFECTS OF LIFESTYLE CREEP
Lifestyle creep can affect you financially in many ways:
- Your savings rate will be less than it can be
- Retirement accounts can suffer
- Debts are repaid slower
- Expenses increase and may exceed the new level of income
Ultimately, lifestyle creep will stunt the growth of your financial stability and improvement. You’ll never have the feeling of getting ahead and will still feel the imprisonment of living paycheck to paycheck.
The constant pursuit of more will never allow you to be satisfied. You’ll always want the next best thing to show you’ve “made it.”
Additionally, excess spending on material items can lead to clutter. Minimalism has grown in popularity and people swear by the benefits of having less; having the essentials.
By having less, wanting less, and improving your financial situation, your mental health and feeling of security will improve.
BALANCE BETWEEN ENOUGH AND EXCESS
Improving your standard of living isn’t a bad thing in and of itself. You should improve your standard of living. Imagine you are a young professional fresh out of college. Gone are the days of eating ramen noodles and renting poorly managed homes.
You should live comfortably, but also need to reflect on the fine line between enough and excess. Sure, you aren’t eating ramen noodles anymore, but are the $25 dinners necessary? Is the luxury sedan a must-have if your current car works fine?
Find what “enough” is for you and save or invest the rest.
10 TIPS TO AVOID LIFESTYLE CREEP
1. Let the one time treats be one time
Rewarding yourself isn’t bad. In fact, it’s encouraged and essential in continuing your progress. A celebration can provide a sense of accomplishment, allow you to decompress from your hard work, and motivate you to achieve more.
The key is to let the one time treats truly be one time. If you received a raise or a bonus, go have a nice night out or buy that piece of tech you have been wanting. Just avoid letting one expenditure become a full-on splurge.
2. Prioritize debt repayment
When your discretionary income increases, your first priority should be paying your immediate bills and paying down outstanding debts. Debt carries interest rates that will detract from your net worth, especially credit card debt.
By using your income to pay down debt, you will minimize the effect of interest and will work towards being debt-free, which is immensely rewarding and relieving.
3. Max out retirement accounts
After debts are taken care of, work to max out your retirement accounts. Allocate the maximum amount to your 401(k), IRA, and any other account you have. By doing so, you’ll ensure that your bases are covered when it comes to retirement.
Tips 2 and 3 will create a solid foundation for you financially. After this, remaining discretionary income can be used a little more loosely.
4. Set goals for your budget
Creating a budget is a great way to guide your spending. By setting goals for the amount you spend on food, groceries, travel, etc, you can stay in line with that budget, even as your income increases.
Your budget should be optimized for what is essential. If you notice you are consistently spending over your budget in certain areas, that is a tell-tale sign that your lifestyle is creeping up.
5. Frequently conduct a financial audit
Going off tip 4, you should frequently conduct a financial audit. I’d say one for every quarter of the year and a year-end audit at the end of December.
Your audit should focus on analyzing and optimizing your income, expenses, budget, savings, and investments. Is everything on track? Are there any improvements that can be made?
6. Save percentages rather than dollar amounts
Set your savings accounts to withdraw a certain percentage of your income per month instead of a dollar amount. This will allow your savings amount to increase as your income increases.
For example, imagine you make $2,000 every two weeks. You set up an automatic rule to save 10% of every paycheck that comes in. Every two weeks you save $200.
You get a big raise and now make $3,000 every two weeks. Since your savings rule still withdraws 10% of every check, you are now saving $300 every two weeks. This is automatic and now that extra $100 of savings isn’t available to be used for any lifestyle creep activities.
7. Create a fund dedicated to fun
Manage how much fun you have by creating a savings fund dedicated to it. You can set another savings rule that stores 5% of every paycheck into an account dedicated for fun, dinners, clothes, or whatever you want.
As that fund builds, you can spend that money guilt-free.
For tips 6 and 7, I would recommend using the Qapital app. Qapital connects to your checking account and let’s you set up different savings accounts with different rules.
8. Spend on experiences instead of materials items
When you do spend, spend on experiences rather than material items. Life is just a collection of experiences and your memory of a great time will be more fulfilling and longer-lasting than your experience of buying a designer t-shirt.
The thrill and satisfaction of buying material goods fade quickly. It will not supply you with lasting happiness. As it fades, you’ll be tempted to buy something else to restore that feeling. This leads to a downward spiraling feedback loop.
9. Surround yourself with the right people
We mentioned how your environment can cause lifestyle creep. Surrounding yourself with spenders can influence you to spend as well. While difficult, you need to analyze if your inner circle is the group you should be hanging around.
If your friend group earns around the same income as you, but spend twice as much, that shows poor money management on their part. If the people you surround yourself with make twice as much as you, it’d be a different story. Then, it could make sense that they spend twice as much as you.
THE GOLDEN TIP? AUTOMATE
I’ll share a golden nugget of information that has helped me avoid lifestyle creep. That nugget is automation. Automating your finances is the best way to stay on track. You can automate your bill payments, savings, and investing.
Nearly all companies and creditors nowadays offer the option for autopay. I highly advise you to enroll. When your bills are automatically paid, you won’t worry about missing them.
Automating your savings is the X factor in preventing lifestyle creep. If you save more when your income increase, and remain disciplined, you won’t have the urge to spend more. We went over this in tip 6.
Automate your investing by setting up automatic withdrawals from your checking account. If possible, max out your retirement accounts. Once those are maxed, fund other investment accounts automatically. As your income increases, increase your funding amount each month.
By automating these three things, you will help secure yourself financially. When you don’t automate, you open yourself up to spending any increase in discretionary income.
Lifestyle creep can be a silent assassin to your finances. Little by little, your standard of living could be increasing past the point of necessity.
Awareness is the first step. Once you identify lifestyle creep happening, you can use the 10 tips shared in this post to help avoid it.