Lifestyle Creep: What It Is and How to Avoid It

 in Blog / Budget  tagged saving

Lifestyle creep is a silent thief. It is the biggest problem with your money. If you are not careful it can destroy your finances. 

It is why the high-income earners still live paycheck to paycheck. Or, why you see athletes who have made 100 million dollars in their career go broke. 

If you fall victim to lifestyle creep you will probably feel like you’re successful. You will have a nice car, a big house, and exotic vacations. 

But, if all your money goes out the window you will never build true wealth. You are robbing yourself of freedom. 

The trick is to recognize lifestyle creep before it starts. I am going to show you how to prevent lifestyle creep for good. 

What is lifestyle creep (Lifestyle Inflation)

Lifestyle creep also called lifestyle inflation is a simple concept. Typically, when people get a raise at work they want to “reward themselves”. Maybe they buy a nicer car, upgrade to a bigger house, or spend more on nice clothes. 

Lifestyle creep is a slow process. You barely notice it happening.

There is nothing wrong with any of these things. But if you constantly let your spending “creep up” you will never build true wealth. 

Typically, what happens is the same person will get another raise. They upgrade to an even nicer car, a bigger house with rooms they never use, and designer clothes. 

If you save and invest the same amount of money when you make $50,000 per year as you do when you make $500,000 a year, you are no better off financially. 

Spending on things that bring you value is the best way to utilize your money. But balancing that spending by adding more to your investments and saving is how to become rich. 

Signs You May Have Fallen Victim to Lifestyle Creep 

Everyone has goals to increase their salary. Maybe when you had an entry-level job. You wanted to take on the world and double your salary from $45,000 to $90,000. 

“If I hit $90k a year, then I’ll be happy.”

Once you hit Your $90k goal, your lifestyle inflates. You begin to say, If I can make $150k a year then I’ll be happy. 

This begins to get worse over time. You take on more payments, mortgage, and loans. Then you want more.  

Think back to when you had the entry-level job. What salary did you think would make you happy? 

If it was where you are now, and you still aren’t satisfied, most likely lifestyle creep has set in. 

This happens to smart people all the time. Why? Because lifestyle creep is hard to manage. It’s hard to recognize. But, it’s even harder to stop it once you start. 

How to Prevent Lifestyle Creep 

You may be starting to recognize that you’ve fallen into this trap. Your self-awareness is much greater than most. Start by congratulating yourself. Most people fail to even see their downfall.

The key is to prevent lifestyle creep from getting worse. Here is how to consciously stop it in its tracks. 

Track Your Spending

Nobody wants to hear the word budget. But, it is important to have a way to track your spending. Why? Because it allows you to ensure your spending does not get out of control. 

Lifestyle Creep that takes away your investing power is spending out of control. 

Understanding where your money is going each month is the only way to get a hold of your spending. You can do this in a spreadsheet, a free app like Personal Capital, or YNAB. 

But, maybe you can never stick to a budget. You hate the word budget deep down in your soul. Then you can do a stress-free budget. 

Each time you get paid, you take the savings off the top, then spend what is leftover. Just make sure to pay yourself first. 

It is that simple. No more worrying or stressing out about the budget.  

Understand What Brings You Value

Understanding your values will help you tremendously when making decisions about your money. When you know what you want your money to do, you see spending as a trade-off. 

Frivolous spending on things that do not bring you value, will take away from spending on things that bring you joy. 

Make a list of what matters to you. Spend lavishly on that list. Then make a list of things you are spending money on that don’t bring you joy. 

I don’t mean things like the water bill or car insurance. These are necessities. 

I mean things like having a fancy car, a bigger apartment or eating out five days a week. 

If big-ticket items like these don’t bring you value, then don’t let them suck your earned dollars from your hands. 

When You Get a Raise Increase Your Savings 

This one is big. You need to make sure every time you get a raise, you increase the amount you are saving. This will allow you to lock in your savings rate early. 

Doing this immediately after your first raise paycheck is a win-win. You won’t “feel” the difference since you were already living on less. And, you can stop negative lifestyle inflation in its tracks. 

I am in no way saying that you can’t buy nicer things. If you want the bigger house, and it fits within your budget, you buy that bigger house. Spending money on yourself is healthy. 

It’s when you spend money on yourself instead of saving or investing, is when you get yourself in trouble. Money is a tool that will work for you. You as the master just need to tell it where to go. 

Imagine if you received a modest 3% raise every year and saved half. Here is how much your savings rate would increase over time, but just saving half of your raise. 

Saving 1.5% More Every year for 25 years.

Now, imagine the bigger raises, promotions, etc. Your savings rate would double, maybe even triple over time. It is not out of the question. In the last five years, mine has quadrupled! 

Create a Fun Money Fund (BMF)

One of the best things my wife and I ever did was create what we call blow money. In our budget, we have funds for each of us. My blow money fund gets a certain amount and my wifes blow money fund gets a certain amount (BMF for short). 

Each time we want to buy something fancy for ourselves we just use our blow money. 

If I want a new golf club, I can get it no questions asked. If my wife wants new shoes, she can buy them. 

This allows you to spend on luxuries you want, all while keeping your spending under control. It’s the best of both worlds and allows for guilt free spending. 

Automate Your Investments 

Lifestyle creep can rob you of the very thing that helps you build wealth, your investments. The more money you pack away into your brokerage account, the faster you will be financially independent. 

Instead of waiting until your paycheck hits your bank and tempting you to increase your lifestyle. You can just throw your money into your investments before you can touch it. 

This is done automating your investments. 

Set up an automatic transfer every time you get paid. Then you don’t have to worry if you’ll have enough invested that month. 

Why Lifestyle Creep Can Be Terrible for Your Finances

Increasing that gap between your income and expenses is the most powerful growth accelerator to building wealth. 

You do this in two ways. 

Controlling your expenses

You don’t let your expenses get too high. Sure you can enjoy nicer things. But, spending the entire amount of your raise without also keeping some for your future is a financial pitfall. 

Increasing your Savings Rate

Your savings rate matters. It is the fastest way to level up to financial independence. It allows you to invest more, and save for emergencies. 

Lifestyle creep will rob you of growing the gap between your expenses and income. As your lifestyle inflates, that gap can shrivel to a sliver. 

I am friends with  a couple who worked hard to increase their income dramatically. Before they had a high Income they were saving a good amount of money. 

Then they got multiple raises. This would be great news for most. 

There was only one problem. 

Their lifestyle inflated so much that they needed to go into debt instead of saving more. They stopped saving and ran up their credit cards. Buying luxury cars and more houses then they could afford. 

It got way out of hand. One day they realized what they had done. They had to claw their way out of their own mess. If they had just maintained their savings date with the low salary they would be retired at age 45. 

Instead they are starting over. 

It’s an incredible example of how psychological money can be. 

The Most Common Lifestyle Creep Categories  

Some of us may fall victim to a specific category more than others. But, lifestyle inflation is the most damaging within the big 3 expenses. That is if your lifestyle inflation is not in a controlled manner.  The big 3 are food, housing, and transportation. Let’s dig into each: 

Groceries and Eating Out

Spending money on food is one of the most common ways to increase your spending without realizing how much your bill has gone up. 

Grocery Store 

Think of the grocery store. In college, you would never buy 12 different ingredients just to make a pasta dish. Instead, you would just make it work without. 

As your income rises and lifestyle begins to inflate, you don’t think twice about tossing all the needed ingredients in the cart.    

Challenge: Add up your grocery receipts from last month. How much did you spend? If you typically don’t track your spending it is going to be much higher than you anticipated.

 I can not tell you how many people have told me they started tracking their spending and groceries were triple what they thought it would be. It is the silent assassin to your budget.

Dining Out

The same goes for eating out. When I started my entry level job I would eat out maybe once or twice per month. The gap between eating out and cooking my own meals was too great to justify my salary. 

As my income has increased, and kids thrown into the equation. I look for what is convenient over what is cost effective at times. The convenience is worth the cost to me. But, my eating out budget has also tripled because of it. 

Your situation may be different. Maybe you’re eating out 5 days a week for lunch with coworkers when you used to pack a sammy. Or, you love to frequent fancy restaurants. Just make sure it does not get out of control. 

Housing 

Upgrading from a one bedroom apartment to a house is part of the sequence of life for many people. When your income is low, you rent the cheapest place in the nicest neighborhood that you can find. 

As your income grows, maybe you buy a starter house in a nicer neighborhood. Something decent that you can afford. You just got married and want a dog so you want a small yard so waffles can catch a frisbee. 

Then you get a big raise and buy a forever house.You have two kids now so the extra bedrooms will help keep everyone happy. 

This is where you can stop and live a perfectly comfortable life. Pay down the mortgage, build wealth, then upgrade once you are debt free if that brings you joy. Yet too many people keep upgrading too quickly. Or worse, buy more houses than they can afford. 

Cars and Transportation 

Unless your parents were the shining example of lifestyle creep, and put a 16 year old in a shiny new Mercedes, you probably drove a pretty crappy car in high school. That is, if you had a car at all. 

In college, you probably drove the same car since you have even less disposable income. 

Then you get your first job and buy a nice used car. Something a few years old. It is the nicest car you have ever owned. You are thrilled. 

Over time, that car may start to feel a little old. Your peers are getting raises and buying fancy cars. 

You get a raise and buy a new car. This time a fancy one. Then a few years go by and your new car smell wears off. There’s new models out now. 

You trade in your now used car and buy another car. The cycle continues.

This is all too common. Your transportation upgrades, if too frequent, can kill your savings rate. Carrying a car payment your entire life is a wealth crusher. 

We All Let Our Lifestyle Inflate A Little Bit (A Real Life Example of Lifestyle Creep) 

Don’t beat yourself up. We all let our lifestyle creep up. As long as you increase your spending within reason, I actually think it’s healthy for your finances. 

When I first bought a house. I did all the yard work.

I refused to pay someone to do something I was able to do. I hated doing it. But, I didn’t want to spend the money to allow someone else to do it. 

Over time my income increased. Then it increased again. 

I grew tired of spending 5 hours a week on my lawn. I was reluctant, but I hired a company to do it for $100 a month. 

It’s the best $100 I spend each month. It truly brings me joy to not have to slave away in the Florida heat every Saturday morning. 

They also do a better job than me! My lifestyle crept up by taking on this $100 monthly payment. But, There’s a lesson here. 

If you’re spending money on the things you enjoy, that’s what your money is there to do. 

I’ve since bought a much bigger house, a few fancy cars, and increased my spending in almost every category. 

But I’ve done it in a controlled way using the lessons we have just discussed. 

I increase my saving and investing first to reach my goals. Then, I spend what is leftover. 

Take it from me. Lifestyle creep isn’t always bad. This coming from a guy who’s lifestyle has crept.

andrew
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