Budgeting 101: What is Lifestyle Creep and How to Avoid It

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.

Want to learn more? Reach out to one of our friendly financial planners today!

Contact Us!

Disclosures1:

1

Taylor Hoffman is an SEC registered investment adviser with its principal place of business in the State of Virginia. Any references to the terms “registered investment adviser” or “registered,” do not imply that Taylor Hoffman or any person associated with Taylor Hoffman have achieved a certain level of skill or training. Taylor Hoffman may only transact business in those states in which it is registered /notice filed, or qualifies for an exemption or exclusion from registration /notice filing requirements. For information pertaining to the registration status of Taylor Hoffman or for additional information about Taylor Hoffman, including fees and services, please visit www.adviserinfo.sec.gov.

The information contained herein is provided for informational purposes, represents only a summary of the topics discussed, and should not be construed as the provision of personalized investment advice or an offer to sell or the solicitation of any offer to buy any securities. The contents should also not be construed as tax or legal advice.  Rather, the contents including, without limitation, any forecasts and projections, simply reflect the opinions and views of the author. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change without notice. There is no guarantee that the views and opinions expressed herein will come to pass.

This document contains information derived from third party sources.  Although we believe these third party sources to be reliable, Taylor Hoffman makes no representations as to the accuracy or completeness of any information derived from such third-party sources and takes no responsibility therefore.

Taylor Hoffman is not a Public Accounting firm, and the information contained herein should not be construed as tax advice. Rather the contents included are a reflection of the view and opinions of the author. There is no guarantee that the information provided fits every situation, and individuals should consult their tax advisor for more specifics.

Taylor Hoffman is not a law firm, and the information contained herein should not be construed as legal advice. Rather the contents included are a reflection of the view and opinions of the author. There is no guarantee that the information provided fits every situation, and individuals should consult their attorney for more specifics.

WHAT OTHER PEOPLE ARE READING...
What is an UTMA?