Updated October 6, 2023
Mike Zaccardi, CFA, CMT
Spending less than what you make is typical boring financial advice. It’s often easy to establish a modest savings rate early in life when there are few responsibilities and you’re not focused a whole lot on keeping up with the Joneses. Over time, though, we all begin to tack on new wants, needs, and desires that drain cash from our coffers. And a gradually rising paycheck as your career progresses allows for it. That’s lifestyle creep.
Lifestyle creep can be a destructive force because it’s not so much a sudden loss of savings that hits you. Rather, bit by bit, your spending rises, putting your long-term financial goals in peril. Remember: Achieving financial independence can only happen if you have a disciplined approach, not letting lifestyle creep chip away at your savings goals.
What Is Lifestyle Creep?
Lifestyle creep is the phenomenon whereby your spending steadily climbs, outpacing increases in your salary. It’s commonly the result of innocent and even worthwhile happenings in life. For instance, you might meet that special someone, and spend lavishly on dates, gifts, and eventually fun trips. Then you and your soon-to-be spouse tie the knot (weddings ain’t cheap!), buy a house (hello a boatload of new recurring expenses), and then have kids (more mouths to feed).
Each of those admirable life events naturally requires more spending – but that is not the primary issue here. The real problem is sort of hidden, focused on the “wants” bucket rather than the “needs” bucket.
Lifestyle creep is sneaky in that small spending patterns, usually caused by social pressures to keep up or even one-up a friend, neighbor, or co-worker, make us spend more. And we feel like we can do that as our income rises. So, the more money you make, it’s as if you feel you deserve to smell the roses amid so many building responsibilities as an adult (the spouse, the kids, the house).
Picture it like this: Have you ever walked into a store (or browsed Amazon) with no real intention of whipping out your credit card, then you spot that shiny, alluring toy? You say to yourself, “I never knew I needed that until today!” So, lifestyle creep can twist what we think are necessities.
Remember back to your college days? You may have been forced to get by on a paltry amount of cash each week. Maybe you had roommates, ate Ramen for lunch each day, and teamed with your friends to defray costs every chance you could. Then you got a real job with a steady salary, and noticed that colleagues had a nicer car than your clunker from college. Perhaps you decided to pop for a new ride by taking on a hefty loan. Once in your fresh wheels, you had to play the part with a gourmet coffee each morning as you stepped into the office, right? Those are usually the first stages of lifestyle creep that can continue for decades if you’re not careful. How quickly it can be to go from thrifty to spendthrift!
What Are the Causes?
Lifestyle creep can impact even the savviest of savers. It’s so easy to let social pressures and the feeling of “I’m owed some fun” seep into our spending patterns. Whether it is via outside forces or our own behavioral quirks, first recognizing that lifestyle creep is hitting you hard is the first step to mitigating its impacts. The key thing is knowing your triggers and setting up strategies to ensure your savings goals are on track. We’ll get to those a little later.
A big driver of lifestyle creep is not having a plan with your discretionary income. That money might feel like it’s burning holes in your pocket. Mindless spending can quickly set in – if there’s an opportunity to spend that extra cash, you feel compelled to do it.
Others describe lifestyle creep as your personal inflation rate. It can rise quickly in your 20s and 30s if you don’t have guardrails in place. What’s more, we find that it can happen to anyone regardless of their income; even folks making bank with incomes well into the six figures might feel as if they are struggling to make ends meet. A trap is to fall into the dangerous thinking that you can simply earn more to fix the problem. Not so. It requires an intentional disciplined savings strategy to get back on track.
Make More, Spend More. What’s Wrong with That?
Does this sound like another personal finance lecture? After all, shouldn’t you be able to take a financial victory lap now and then? Of course celebrating periodic life events, achievements, and even hitting money milestones are totally fine and can even buffer the risk of lifestyle creep. But lifestyle creep turns vicious over years and decades. Those innocuous one-time splurges so often turn into mindless routines. And when the pattern sets in at an early age, watch out.
Let’s talk numbers. Suppose you spend an extra $3,000 per year financing that new luxury car compared to a modest gas-saver. It might not seem like too much compared to your salary, but let’s flip the script and analyze the so-called opportunity cost (or the price tag of not investing). $3,000 annually compounded at 9% per year for 40 years (perhaps from age 25 to 65) would grow to more than $1 million. Now would you rather have that sleek ride, or would you choose to shun the socially driven urge to spend?
Another issue people encounter with lifestyle creep is that it can result in a more stressful life. There is always that feeling that you must do more to meet the perceived expectations of others. It can be mentally exhausting to feel like you need to do more to capture the approval of your peers.
The good news is you can avoid these financial and psychological traps caused by lifestyle creep. Also, if you see yourself in some of the hypothetical situations described earlier, take heart knowing that it happens to so many people. It’s kinda like we are just wired this way. It stems from the instinct that human beings desire to be part of a tribe, or in-group.
Now it’s time to go about fixing the flaw.
Ways To Avoid Lifestyle Creep
Like so many money issues, making a plan and a budget works wonders to get back on the winning side of the game.
Yes, budgeting can suck sometimes, but it is the medicine required to remedy your financial ills. And you don’t have to be an expert tracker of your income and spending – there are great apps available these days to make it easy and save you time. Additionally, you do not have to budget for the rest of your life. Once you have developed better spending behaviors, you may ease off the budgeting gas pedal.
More practically, aim to be prudent in the big areas of spending: housing, transportation, food, and even your health. How much you dole out monthly on your apartment or house should be no more than about 25% of your take-home pay. And we have already chastised you about buying an expensive car. As for food, keep your ‘eating out’ budget line item in check. Finally, nobody talks much about living a healthy life as an effective financial strategy, but it really is critical considering how pricey it is to get good health care nowadays (particularly later in life).
Here’s another tip that can help you save more without even noticing: Each time you get a raise or if you earn a big-time promotion, instead of spending that extra few percent a year on everyday items, increase your 401(k) contribution percentage. Many employer plans help you do this automatically via what’s known as the “auto-increase” feature. Every January, you can save, say, 3% more for retirement and you’ll hardly notice a difference in your paycheck since it coincides with your pay bump. It will also work to keep your spending in check.
Finally, avoid high-interest-rate debt like the plague. The worst thing is when overspending leads to living beyond your means and having to rely on credit cards. If this is you right now, make it your mission to live like a college kid temporarily so that you can knock out that debt and raise your credit score. Once you’ve hit that goal, you will be in better shape than others since you’ve already become accustomed to living frugally.
The Bottom Line
Automating your finances can keep lifestyle creep out of your vocabulary. Allio’s next-gen finance app with an investment strategy designed for you makes saving easy. The secret to getting ahead with your money is just to get started, and the truth is YOU have the power over your money, not your peers. You can tame lifestyle creep by investing in your future, knocking out one financial goal after another.
Allio’s mission is financial wellness for all. You can get started today by downloading the app and automating your saving & investing strategy with Allio.
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