What is lifestyle creep and how do you avoid it?
Picture this – you have worked your way up the ladder and have landed your dream job. On top of that you have been given a generous raise. Soon you find yourself eating at only the nicest restaurants, driving a new car, and traveling first class. Despite the extravagant lifestyle you have adopted, you find yourself still living paycheck-to-paycheck, wondering why your savings have not increased the way it should, or why you have accumulated more debt.
If you have ever found yourself in this position or know someone who has experienced this, lifestyle creep is the culprit. The concept of lifestyle creep, or lifestyle inflation, is when an individual’s spending increases as a result of earning more money. An increase in discretionary income may cause someone to shift their spending habits without them noticing its adverse effects. The perception of needs and wants changes because luxuries become more accessible. An individual may be conservative with their finances, but the thrill of getting promoted and receiving a bonus could turn them into a spendthrift before they know it.
Examples of lifestyle creep include:
- Upgrading to a more expensive car, even if there’s nothing wrong with your current one
- Eating out more often (and at nicer restaurants)
- Upping your wardrobe to luxury-line and/or designer clothing
- Buying coffee or lunch every day
- Flying first class instead of coach
- Purchasing a vacation home and/or taking more expensive vacations
- Buying new “toys” such as boats, recreational vehicles, electronics, etc.
How to Avoid Lifestyle Creep
Managing your money responsibly and being proactive can help keep you from falling prey to lifestyle creep. A monthly budget is a must. That daily $4 coffee from Starbucks may seem harmless, but smaller recurring purchases add up quickly. Also consider the alternatives for how that money could have been used: your $80 per month in coffee could have been invested or put towards paying down debt.
Here are some pointers to help you avoid lifestyle creep:
The Bottom Line
The saying “everything comes at a price” is the epitome of what lifestyle creep entails. Being responsible with your money is easier said than done. This type of lifestyle is subtle and usually unintentional, affecting people close to retirement as well as younger savers.
Tendencies associated with lifestyle creep can interfere with how much an individual chooses to save and spend. If you have $100 and put 5% of that aside for extra purchases, that is $5. Putting 5% of a $200 bonus would be $10. A wise decision would be to put the extra $5 in savings or investments. The key to bypassing lifestyle creep is finding a balance between saving and spending, distinguishing your needs versus your wants, and focusing on your financial goals.
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