Lifestyle Creep

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“Lifestyle creep is one of the biggest and often most overlooked barrier for Americans to building long-term wealth.”

Lifestyle creep, sometimes called lifestyle inflation, is when living expenses and non-essential expenditures grow with income. Essentially, it’s your lifestyle and standard of living creeping up to levels you wouldn’t have been able to maintain earlier in your life. This unnecessary spending might mean joining a beach club, installing a backyard swimming pool or eating out more frequently. Or, it could mean buying a second home or a new car.

And, “when your expenses continuously increase in lockstep with your income,” that when lifestyle creep can set in, said Nilay Gandhi, a CFP and senior wealth adviser with Vanguard.

Some examples of lifestyle creep, according to Investopedia, include:

  • Spending several dollars per day on coffee
  • Flying premium economy rather than coach
  • Eating out frequently and more expensively
  • Purchasing expensive clothing and jewelry (and more of it)
  • Paying for housekeeping and lawn care
  • Buying or renting more house than you need (or a second home)
  • A third car, a boat, or replacing a car sooner than you need to

On the one hand, it’s only natural to increase your spending as your income rises. After all, you work hard to buy and do the things you love to do in life. “It’s when that higher spending happens mindlessly, rather than intentionally, that it becomes problematic”, says Mary Lyons, an investment adviser and founder of the Benchmark Income Group in Dallas.

Lifestyle creep can happen to anyone, no matter your income. Even when high salary earners are asked to name their top financial challenge, nearly half stated an inability to save enough.This highlights an important fact: There’s no outearning lifestyle creep.

Lifestyle creep is most visible among high earners. Living within your means can seem straightforward when your means are small. You can tell yourself that, after your next raise or bonus, you’ll simply save more money and keep everything else the same. Yet, “The number one culprit of lifestyle creep is spending on your credit card and paying it off every month,” says Katie Waters, certified financial planner at Stable Waters Financial. “Just as work expands to the time allotted, expenses will expand to the credit limit.

One of the most detrimental side effects of lifestyle creep is that spending more inevitably means saving and investing less. Lifestyle creep can also lead to additional life stresses, says Ami Shah, a certified financial planner in Washington, D.C., and CEO of Steward, a financial planning software tool. For example, if your lifestyle becomes dependent on a certain level of income, what happens if you want to switch jobs or careers?

The best means to manage and prevent lifestyle creep is to create a financial plan and a budget, and stick with both. And many financial experts contend that the first line of defense is not overspending on housing, often someone’s highest expense. Generally, you should keep monthly housing costs below 25% of your net income. And, if the amount you’re saving and investing falls below 20% of your net income, that could be an indication of lifestyle creep.

Financial experts suggests paying yourself a weekly allowance to remain intentional about your spending, no matter how much money you make.

Spend below your means

“People get rich by earning money; they stay rich by spending less than they earn. ”

If you’re able to live on only 70% to 80% of your income, you’ll have enough left over to save and invest. To do that, focus on spending very intentionally and reducing or eliminating high-interest debt.

Spending intentionally doesn’t require pinching every penny, but you should know and track where those pennies are going and ensure that spending is something you value, whether that’s travel or other desirable experiences.

References:

  1. https://www.marketwatch.com/story/this-is-one-of-the-biggest-barriers-to-building-long-term-wealthis-it-happening-to-you-11630079820
  2. https://www.investopedia.com/terms/l/lifestyle-creep.asp
  3. https://www.realsimple.com/work-life/money/money-planning/lifestyle-creep
  4. https://www.nerdwallet.com/article/investing/how-to-get-rich
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