The concept of lifestyle creep is likely not foreign to you. As the word ‘creep’ suggests, it can catch you by surprise and could lead you down a longer path to financial freedom. Let's dive into what lifestyle creep is, identify its signs, and explore strategies to keep it at bay.
So what is lifestyle creep?
Lifestyle creep, also known as lifestyle inflation, refers to the gradual and often unnoticed increase in one's spending as their income rises. It's like a silent thief that sneaks into your life, enticing you to upgrade your lifestyle with every pay raise. Imagine you land a higher-paying job, and suddenly, you start dining at fancier restaurants, buying designer clothes, and upgrading to a more expensive car. That's lifestyle creep in action.
What are the signs of lifestyle creep?
1. Bigger and Better - One common sign is consistently opting for larger, more expensive versions of things – from homes to electronics – simply because you can afford them now.
2. Frivolous Spending - If you find yourself spending money on items that you previously considered luxuries but now see as necessities, like dining out or frequent online shopping sprees, you might be experiencing lifestyle creep.
3. Neglecting Savings - As your income increases, it's easy to rationalise saving the same amount (or less) that you were previously doing whilst spending more. If you're not allocating a consistent portion of your income towards building assets for your financial future, this could be a red flag.
4. Peer Pressure - Keeping up with the Joneses is a classic sign of lifestyle creep. If you're making financial decisions based on what others are doing rather than what's best for your own goals, it's time to take a step back, review and refocus.
So what can you do about lifestyle creep?
In Nick Maggiulli’s book, Just Keep Buying: Proven Ways to Save Money and Build Your Wealth he presents a simple rule of thumb for preventing lifestyle creep.
Save 50% of all your raises for retirement and spend the other 50%.
As an example, if you receive a $10,000 (after tax) pay rise, he proposes putting $5,000 in savings and investments for your retirement (for a lot of us this would be super) and splurging the remaining $5,000.
He believes this is a balanced outcome that will control lifestyle creep by setting rules on what is invested versus what is spent.
The practicality is the hard part. Not all pay rises are paid as a lump sum. Let’s say you are paid $40 per hour and your boss decides to increase this to $43 per hour.
First of all, good on you!
Your weekly gross wage (38 hours) goes from $1,520 to $1,634. Once the tax man gets hold of you the after-tax take home is $1,179 before and $1,254 per week, an increase of $75.
Whilst not impossible, contributing $37.50 to your super, mortgage or investments each pay packet is going to be seen by many as onerous and many will forget and give up, meaning the extra $75 each week goes back into the pool of living money with no direction, this is when lifestyle creep will prey.
One sure-fire way to make sure the extra funds go to the right place is to automate. You could tell your employer you want to salary sacrifice $37.50 each week or you could set up automatic payments to your mortgage of investment account each week.
Does this now mean you can splurge your $37.50 extra each week? Well yes, but not really.
Once again, this lacks practicality. What you could do is automate this amount to go to a special spending account that can be used to save for holidays, Christmas, special dinners etc. That way you are getting a splurge benefit without the cash being rolled into your day to day living account.
As a year passes by, you will have saved and invested $1,950 and spent the other $1,950 in whatever way you wanted.
It can get more technical if you start including savings rates, current investment balances, years to retirement etc, but the above is a great starting point.
Lifestyle creep is a subtle yet insidious financial phenomenon that can impact anyone, regardless of income level. It's essential to be aware of the signs and take proactive steps to prevent it from eroding your financial stability.
By automating the direction of your pay rise, you will be able to enjoy all the benefits that you work so hard to receive.
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