Lifestyle Creep

Roshan Pourghasemi

  • What is lifestyle creep?

    • Go a bit into the math, show how LC can sneak up on you and how LC over time can really eat at your savings/investments/retirement ability

  • How do you avoid LC as your career progresses? How do you balance enjoying your life with prudent saving/investing?

Abstract

Lifestyle creep is the phenomenon of increased discretionary spending as your income increases. This harms your financial health, as many people experiencing lifestyle creep find themselves spending money that should be going to savings and investments on luxuries. The hardest part about lifestyle creep is that it feels like progress, but it is important to not forget your financial goals. If you can keep your goals in mind and work towards them, then no one should be stopping you from enjoying the rewards of hard work.

It’s safe to say that a large career goal for many of us is to make more money as we progress. Especially with the lavish portrayal of the lifestyle of the rich, it’s easy to fall into the trap of trying to emanate that without having the proper means to sustain that kind of lifestyle. If you are ever finding yourself justifying buying luxurious goods as though they are necessities, you are falling prey to lifestyle creep.

Key Takeaways

  • Lifestyle creep is the phenomenon of increased discretionary spending as your income increases.

  • Lifestyle creep is enjoyable in the moment, but will ruin your financial health in the long run. Furthermore, it does not allow you any leeway if an emergency occurs, as you will be using your money on luxuries rather than saving

  • Some common signs of lifestyle creep are seeing luxuries as necessities, spending large sums of money daily, feeling the need to flaunt your wealth to impress others, and you can’t imagine going back to your previous lifestyle.

  • Some ways to avoid lifestyle debt are making a new budget including financial goals, reconceptualizing what your financial goals are, avoiding going into too much debt, and automating savings and investments.

What is Lifestyle Creep?

Lifestyle creep is the phenomenon of increasing discretionary spending as your income rises. This can come from developing a taste for the finer things in life or a growing amount of regular expenses that leech from your bank account. Some examples are eating out many nights a week, buying expensive clothing, increasing rent, buying pents, and many other things.

While all of these things can be very enjoyable in the moment, they tend to eat away at the money you’ve saved for your financial goals like emergency savings, contributing to retirement funds, and putting away money for larger purchases. Your new lifestyle could take over without you realizing it and your finances may not be able to keep up with it long term. Furthermore, people have a tendency to take out more debt when they have more income as they believe they will have an easy time paying it back. If you have any unexpected event that causes financial hardship, your lifestyle may all go up in flames.

Some common signs that you are experiencing lifestyle creep are

  • Having things that used to be seen as far off luxuries are now seen as necessities for you.

  • Spending large sums of money on things that are quickly consumed without any second thoughts.

  • You’ve become more comfortable with spending large sums of money everyday. An example could be that you used to pack your lunch for work everyday but now you spend $15 every day getting lunch.

  • You can’t imagine going back to your previous lifestyle as that would make you think that you regressed.

  • You feel the need to flaunt your wealth to impress the people in your life.

An Example of Lifestyle Creep

Let’s say that Alice starts off with a networth of $0, makes $50,000 a year, and spends $45,000 a year. If Alice’s salary increased by 6% a year and her expenses increased by 2% a year, the following table shows what her net worth would be over the next 20 years.'

Now, let’s look at the tables if the expenses grew at 4% and 6% respectively.

The following is a graph of each net worth over time. As you can see, the effects of lifestyle creep can have profound effects on your net worth.

How to Avoid Lifestyle Creep

There are many things you can do to minimize the effects of lifestyle creep. Generally, as long as you can notice that you are falling victim to it, you’ll be able to correct it before it’s too late.

  • Create a monthly budget and stick to it. As your income increases, your budget will change with it. As long as you are budgeting to keep yourself on track for your financial goals, then you can spend some more on other luxuries. Remember, the biggest harm of lifestyle creep is the derailing of your long-term goals, so, if they can stay strong, then you can use the other money however you want.

  • Reconceptualize your financial goals based on your desired lifestyle. Retirement is the replacement of income, and, if you wish to continue a higher lifestyle, you may need to approach retirement differently than you did previously. It is beneficial to calculate how much you will need to save to retire with an income that you are comfortable with. Furthermore, it may be unrealistic to expect the same amount of income when you retire. To that end, it is important to conceptualize your discretionary spending and deciding where to draw the line.

  • Don’t get yourself into too much debt. If you let your debt pile up on itself, then your financial health will suffer for it. Only go into debt when you have a plan laid out to pay it back, and, even then, be cautious whenever you are taking any debt out.

  • Automate savings and investments. This goes hand in hand with budgeting. If you automate these withdrawals and pretend like this money was never there in the first place, your financial health will thank you.

The hardest part about lifestyle creep is that it feels like progress. You are progressing through your career so you feel that it is only natural that your lifestyle changes with that. In some senses, that is correct. If you keep progressing to your financial goals, then there is nothing wrong with enjoying the luxuries of life. It only becomes a problem when you are reckless. Don’t lose track of your financials, and you’ll be able to reap the benefits of your progress with no worries.