In the pursuit of a comfortable and fulfilling life, many individuals find themselves succumbing to a subtle but insidious phenomenon known as lifestyle creep. Also referred to as lifestyle inflation, this term describes the gradual increase in one’s spending as income rises. It is natural to want to improve your living standards with an increase in earnings and, I believe, good to reward yourself for all the hard work you put in to receive a raise or a bonus. Left unchecked, however, lifestyle creep can lead to financial stress, hinder savings and jeopardize long-term financial goals just when you think life is going well for you.
Lifestyle creep occurs when individuals experience an increase in income, either through a salary raise, a new job or other sources of financial gain, and subsequently adjust their spending habits to match or exceed the higher income level. Celebrating with a fun night out on the town or buying yourself something you wanted is just fine, especially when you received a raise. It is okay to celebrate your accomplishments in a material way. But lifestyle creep can happen in more subtle ways. You may have had a habit of picking up takeout once a week to remove the stress of cooking. During a stressful week, you add an extra night or two with a food delivery since your new higher paycheck seems to allow for it. But then the three-night takeout morphs into a habit rather than a one-off and suddenly you have lifestyle creep. You start to upgrade various aspects of your life such as housing, transportation, travel, dining and entertainment. What starts as a seemingly innocent improvement in lifestyle can gradually spiral into a cycle of increased expenses that outpace income growth. It is those slow additions adding on top of each other that overwhelm the actual pay increase.
Several factors contribute to the development of lifestyle creep and understanding these triggers is crucial for individuals seeking to manage their finances effectively.
1. Peer pressure and social comparisons. It’s the proverbial ‘keeping up with the Joneses’. We are inherently social creatures, and the desire to fit in or keep up with peers can lead to increased spending. Whether it’s a new car, a luxury vacation or the latest gadgets, the pressure to match the lifestyle of those around us can be a powerful driver of excess spending. You keep driving by the nice cars in your neighbors’ driveways and, next thing you know, you are trading in your car. Those social clubs and sports or music lessons can quickly add up.
2. Marketing and consumer culture. Advertisements and marketing campaigns are designed to create desires and promote consumption. The constant exposure to these messages can influence individuals to seek instant gratification through purchases, even if it means compromising long-term financial stability.
3. Lack of financial awareness. Lifestyle creep happens when we are not fully aware or paying attention to our financial situation and the consequences of the changed spending habits. Without mindfulness toward a long-term financial plan, short-term decisions can have long-term financial consequences without realizing.
While lifestyle creep can be a recurring challenge, it is not inevitable. With mindfulness and focus on your financial plan, we can navigate the everyday purchasing decisions during a period of increased income and avoid the pitfalls of ever-present opportunities to spend.
1. Prioritize savings. With a bump in pay or receipt of a bonus, making a bump in savings a priority quickly pushes lifestyle creep out of the way. Refilling any emergency fund can provide long-term peace of mind. If you can keep the same percentage focused for saving or make a quick funds transfer to savings after a bonus, you are well on your way to maintaining your plan toward your long-term goals.
2. Establish a budget and review it periodically. Create a budget to set financial goals and priorities. Revisit that budget periodically, especially when we experience a raise or receive a bonus. Understanding the balance between reasonably improving lifestyle and the increased income is key.
3. Know what really makes you happy. Self-awareness helps you to avoid lifestyle creep. If you know that developing and maintaining connections is important to you, then it is easy to prioritize the extras that enhance that aspect of life. If the latest fashion is not your passion, itis easier to resist the impulse to buy.
4. Create a “wish list” for the shorter-term, smaller items that would make your life better. While the larger purchase of a home should bring about a significant review of your financial situation, buying the new rug for the living room rarely elicits a trigger to review your finances. If, however, the new rug was part of the wish list, you might stop to compare its spot in your priorities to other lifestyle choices for that money. Make choices intentionally rather than impulsively.
5. Set realistic goals. Financial goals should not only be clearly defined but realistic for the type of life you can afford. Having a goal to enjoy a vacation or buy a new car is great but be honest with yourself as to what fits your life. Does a luxury resort fit, or can you make a country cabin relaxing? Is that next car a Honda or a Mercedes? Or can you make tradeoffs between vacation and car?
6. Learn to say ‘no’. The ability to say no to unnecessary expenses or social pressures is a powerful tool in managing lifestyle creep. Confidence in your priorities will help you maintain control over your spending habits.
7. Regularly review and adjust your financial plan. Financial circumstances change over time as do your goals. It’s essential to regularly review your short-term budget, your savings goals and your long-term life goals. A financial plan should be a living document that adjusts to ensure your goals are aligned with your situation and hopes.
The world is full of opportunities – opportunities to focus on your goals. It is also full of distractions that can lead you astray. You work hard and should be able to celebrate your accomplishments. Keeping your priorities at the forefront will help you realize long-term success.
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