Lifestyle Creep Is Your Worst Enemy – How To Defeat It

Lifestyle Creep’s Meaning, Definition and Effect on Your Wealth

Do you know what one of the biggest factors keeping people from creating wealth is?  Do you know the Jones, and are you trying to keep up?  Ever feel like the more you earn, the less you have left over for yourself?

If you are like most young people – those questions hit home a bit.  This is what lifestyle creep and lifestyle inflation are all about.  In this article I will share with you 30 years of experience in working with clients as a financial planner and financial coach – and help you build wealth.

Lifestyle inflation happens when your expenses increase along with your income. As earnings increase, it’s natural to want to buy a better car or take another vacation. But if your savings rate isn’t keeping up, you could end up worse off compared to when you earned less..

Further down in the article, I discuss the MRM Rule of Thirds – if there is only one thing you get out of this article – please scroll down and read that section!!

Summary:

• Lavish lifestyle creep is the gradual increase in one’s standard of living over time.
• Lifestyle inflation can be caused by a number of factors, including inflation, increased discretionary income, and changes in social norms.
• Lifestyle creep can have both positive and negative effects on individuals and society.
• Some ways to avoid or mitigate lifestyle creep from occurrng include mindful spending, setting limits on spending, and living below one’s means.

What Is Lifestyle Creep Definition 

Have you noticed all of  a sudden you are paying for subscriptions like a gym membership or streaming service, that you no longer use?  Most people fall for it – so it is very common.

Lifestyle creep occurs when your expenses gradually keep increasing.  Just like inflation, it creeps up on you.  The danger of this is how slowly and gradually it happens.

It’s kind of like gaining weight.  A pound or two here and there, no one notices it.  A few years go by and you are in your 40’s and you are wondering what happened.  A pound or two has turned into a dozen or two extra pounds.  Welcome to lifestyle creep.

“be sure to live within your means”

– everyone and their mother

Have you ever heard this incredibly common piece of financial advice?

What does that even mean, really?  We know it means don’t spend more than you earn.  But it is also missing the entire point.

And that is where lifestyle creep comes into play.  What happens if I live within my means and then I get a promotion or a new job.  And now I am earning substantially more money than I did a few years ago.

Guess what – my means went up.  But so will my expenses, so will me ‘living within’.  

Lifestyle creep is the gradual increase in one’s spending as their discretionary income grows. It is often described as “keeping up with the Joneses.” Lifestyle creep can be a dangerous phenomenon, as it can lead to debt and financial problems down the road.  Lifestyle creep can also frequently lead to debt and underfunding of savings goals.

How Do I Balance My Lifestyle?

Simple – figure out what you need to do today, to ensure that you have the lifestyle you want in the future.  There are several tools that you can use online for free to help give you a better idea if you don’t already know the answer.  

Even better is to work with a financial planner or a financial coach like myself.  But that is not the point of this article.  Those articles is here 

Once you know your future self is taken care of – you can now live your life today guilt free…  So, the overly simplistic advice of “live within your means”.  I disagree.  Live the life you want today, and tomorrow.  If you can’t afford to, I hate to be crass but there are only three options:

1. Change your goals
2. Earn more money
3. Win the lottery

I don’t suggest counting on number 3

How To Avoid Lifestyle Creep?

I’ll bet you thought I was going to lecture you to stop spending money on Starbucks every day. 

The good news?

This isn’t about penny pinching and taking away all of the things you enjoy.  Avoiding a lavish lifestyle and creep is more about the big picture.  It is about allowing you to be mindful of your money, and to make good choices about what is important to you.

What kind of car you drive, how often you go out to eat or get a coffee, the type of clothes you wear – those are your choices to make.  I am here to share my knowledge and experience from working with thousands of people just like you.

The basic choices we make every day are how we spend or save our money.  I always told my clients – you are living two lives with every dollar.  Today and tomorrow.  We need to find the balance between the two so you allow money to buy you happiness in both lives.

Every time you decide to spend money – you choose to enjoy today more, and enjoy tomorrow less.  And vice versa.  It is that simple.  So small sums like a cup of Starbucks – if it brings you joy  that is fine.

It’s when we get into the bigger purchases that it starts to really matter.  An extra thousand dollars on rent, or an extra $200 on a car lease – that adds up.  But again, if it brings you joy – as long as you made a conscious decision – that is fine.

It is very important to keep it in mind that there is nothing wrong with spending your money.  As long as you make a conscious decision, a well thought out decision, there is nothing to feel guilty about.  And the same for those who give up their today – to save for a better tomorrow.

Depriving yourself today, or tomorrow, is never the answer.

So the bottom line is – you need to find the right balance for you – between your life today and your life tomorrow.  How do you do this?

How Does Lifestyle Creep Occur?

As I said, it happens slowly.  So it is difficult to point to just one thing and say this is what caused lifestyle creep.  So how does it happen, and why don’t we notice lifestyle inflation?

You graduated from school and you got your first job.  For the first time in your life you sense some freedom.  You get a car, you get your first apartment.  You start to treat yourself and get all of those things you always wanted.

You keep working hard, you start to get pay raises and promotions.  All of that hard work deserves to be rewarded, right?.  You buy some nicer clothes, you buy a nicer car.  A bigger apartment.

Rinse and repeat – a few years go by.  Your friends are all living it up – nice cars, nice vacations.  You start keeping up with the Joneses.  After all, you are only in your 20’s – retirement is so far away.

Now you are in your early 30’s.  You’ve started a family.  Want to talk about inflation or a lavish lifestyle creep – have you ever heard about the cost of raising kids? 

You’ve started to contribute to your 401k a little bit over the years.  To take advantage of the free money, the company matches.  So you feel good seeing it rise.  Slowly, but are you saving enough for retirement?

There’s a good chance that you don’t want to wake up one day and not be able to remember how or when you spent all of your hard-earned money. So, this is why you need to stop your lifestyle inflation now before it gets out of hand.

It’s simple how lifestyle creep happens.

• You always wanted certain things, and now you can afford them.
• Your friends are driving nicer cars, it is very tempting to fit in.  Consciously, or subconsciously – we want to show people we are doing well financially.  And nice things “proves” you can afford them
• Who doesn’t want a nice big house in a fancy neighborhood that they can invite their friends over to?
• Who doesn’t want to feel good showing everyone you can afford those $500 pair of shoes?
• Who doesn’t get jealous seeing a friend on vacation sharing their pictures on social media
• Woo doesn’t want their friends to admire how well you are doing?

Well, let me tell you the truth.  Under the hood things are not what they always seem to be.  How do I know?  Because people have come to me for thirty years asking me to look under their hoods.  And I’m telling you – it is rarely as pretty as you would expect.

I can’t count the number of times people were referred to me because “they have a ton of money, they should work with you”.  And then they came in to do financial planning and oh boyyyy.

I won’t go into it here – but I promise you one thing.  What you see is very rarely what is truly there.  I cannot suggest an old book more than “Millionaire Next Door”.  Buy it here on amazon or get a copy from the local library.  I rarely suggest owning a book you will only read once.  But this is one of those books everyone should keep and re-read parts of it over the years.

For those who refuse to take my advice about the book – here is my summary:

The Millionaire Next Door is a 1996 book by Thomas J. Stanley and William D. Danko. The book is based on an extensive study of over 10 years of data on millionaires and wealthy Americans. The book dispelled the myths about who millionaires are and how they got to be wealthy.

The authors found that most millionaires are not flashy or ostentatious with their money. In fact, they are quite frugal. They live well below their means and invest a large portion of their discretionary income. The authors also found that most millionaires are self-made, not inheriting their wealth.

The book has become a classic in the personal finance world, and its insights are as relevant today as they were when the book was first published. If you’re looking to learn more about wealth and how to build it, The Millionaire Next Door is a must-read.  

What Are The Consequences of Lifestyle Creep?

Before you learn anything further about lifestyle creep or lifestyle inflation – you need to understand the biggest consequences of it.  

• Your wages increase substantially more in your early years
• The long term costs are much greater than the short term costs.
• Time passes quickly, and life cost a lot.

1. The reality is, your wages will increase by far their largest from your 20’s through your 40’s.  In your 50’s they will flatten out, and actually decrease.  I’m not just spitballing this – smarter people than me studied this.  Take a look for yourself here if you are interested or don’t believe me.

So if our lifestyle creep continues – at some point our income will not increase at the same rate.  But with inflation our lifestyle will continue to cost more and more.

So the key point is – if you let your lifestyle creep up continuously – it will get more and more difficult to continue as you progress in your career.

2. Another massive consequence is the cost.  What I mean by that, we never really fully think through the cost.  

For example.  I am looking for an inexpensive car.  And I will need to borrow about $25,000.  As I am car shopping, I realize I like the next model up or I want some of the bells and whistles on the car I am interested in.

I realize the price will be about $5,000 more.  The salesman ran the numbers.  It is “only” an extra $92 per month.  I’m thinking – that’s not much – it is worth it.

4% car loan for 5 years:

Now.  What’s the cost?  Not $5,000.  It’s actually $157, 046.  WHAT?

Yeah, if I took that same $5,000 and invested it from 25 years old to age 65 at 9%, It would grow to $157,046.  Let’s back out inflation, and it’s worth over $50,000 in TODAY’S dollars.  So the extra $92 a month – just on THIS car purchase – will cost you $50,000 in today’s dollars or $157,000 in future dollars.

And that is just from one simple decision.  One the average person makes every three to five years…

3. You have started to think about retirement a little bit.  You’ve been trying to save money for that nicer home.  But no matter how successful you have been at work – it seems like you are going backwards.  Ahhhh, you’ve discovered lifestyle creep.  And it is starting to rear its ugly head.

You worked hard, and played hard.  And you always rewarded yourself, but it never felt extravagant or overboard.  So what happened?

You used to like those pay raises.  Now you NEED the pay raises just to stay afloat.  Just to keep up.

Remember the weight gain analogy from earlier?  You have now put on the equivalent of 5-10 pounds.  Barely noticeable and you know you can lose it whenever you want.

This is the turning point of lifestyle creep.  You are starting to see the consequences of lifestyle creep – but not really feeling it.  

How Can You Avoid Lifestyle Creep?

Here are three ways you can keep your lifestyle from getting out of hand or keep it in check.

1. Make a budget. Or as I call it a spending plan. This is the antidote for lifestyle creep.  Read more about creating a spending plan here.

The reason lifestyle creep got to this point is simple.  We often are not mindful of our spending habits.  This is an absolutely necessary first step to avoid lifestyle creep.  Or to overcome lifestyle inflation.

Step 1 – Keep track of how you spend money in order to understand and change how you spend your money. In order to make sure that your spending habits don’tt get out of control, the most important thing you can do is to make and keep a budget and stick to it.

2. Plan and prepare for your future pay raises.

Figure out how much your wages will go up, and how much your expenses will grow over time as well.  You can’t control inflation – but you can prepare for it.

There should be a plan in place when your pay goes from $80,000 to $100,000. 

When you get a raise in pay, I have a simple rule that I have always worked with my clients on.  It is simple, it is the 

MRM Rule of Thirds.

Anytime a client gets a bonus, a pay raise, or any other unexpected sum of money – they immediately know what to do with it.  A third, a third, a third.

• A third will go to taxes.  No way around that.
• A third will go to tomorrow – this money will be saved for retirement, college or whatever their financial goals are.
• A third will go yesterday or today – to pay any debts or build a cash reserve if necessary.  If not, it goes to them, to reward themselves.

Related Reading: MRM Rule of Thirds – I go into more depth here

• So you got a $20,000 pay raise.
• After taxes, you will keep 65% of it.  
• You will increase your savings, and reward yourself at the same time.

Can you see how this prevents lifestyle creep?

You can never let your lifestyle get ahead of itself with this rule.  But at the same time, you are always feeling like you rewarded yourself as well.

The difference is – you have a plan.  The difference is, you are taking control.  You are mindful of your lifestyle, you are fully aware of your expenses – and won’t let lifestyle creep take over.

Michael – now you got me all excited about earning more income.  GOOD!!

• Ask for a raise if you feel you deserve it.
• Look for jobs elsewhere – find out your worth.
• Pick up a side hustle to earn a little extra money

So What Can I Do To Manage Lifestyle Creep? 7 Easy Steps

There is good news and the bad news about inflationary pressures of lifestyle creep

We all worked hard to start our career and want to reward ourselves.  It makes us feel good, a sense of accomplishment and success, that we can afford these luxuries.

Then we want to keep up with our friends.  You know, the Joneses.  We don’t want to appear any less financially successful than them.

At this point many people decide to get married, have kids, and buy a home.  The expenses here are going wild.  It is no longer lifestyle creep – but lifestyle balloon.  And then wait until they start driving and then go to college…

The good news?  Your expenses begin to slow down.  The lifestyle creep actually starts to reverse itself.  Many decide to downsize at this point, and slow down a bit.  Unfortunately for some, this is more difficult for them.They have grown accustomed to the lifestyle.

One thing to keep in mind when you’re planning your budget is to consider spending more money on experiences than on things that you material items, like cars or clothes.  Research shows that having fun makes you more happy. 

If you can cut back on how much money you spend but still get a lot of pleasure from the money you spend, it’s a win-win. In the long run, you’ll be better off financially if you’re not suffering because you’re cutting back on spending money.

There are a few simple steps we can take manage lifestyle creep:

1. Be mindful of your spending habits.

Track your spending habits for a month or two to get an idea of where your money is actually going.  You will quickly identify several areas that you may be spending more than you need to be.  Being mindful of your spending follows the Japanese approach to budgeting called Kakibu – which I strongly suggest you read more about here

2. Create a spending plan, or budget.

Once you know where your money is going, you can create a spending plan that fits with what your financial goals are.  

3. Automate your savings accounts

This helps with my MRM Third Rule.  if you are automating your savings, when you get a raise – your savings will be increased as well.  Automatically.

4. Live below your means.

I now told you to ignore this horrible advice earlier.  But it is actually good advice once it is incorporated with everything else.  Here we are talking about living below your means – not within your means.

5. Start investing in yourself.

Prioritize yourself .Invest in yourself by taking courses, improving or learning new skills. This will help further your career – but can also help you discover new hobbies that you may enjoy.

6. Save money for an emergency fund

We currently live in a world where everything is becoming a monthly payment or a subscription.  Why?  Because it is easier to sell us things this way.  And companies know we will forget about these recurring expenses like a gym membership.

Instead, build a rainy day fund.  Pay for things upfront, and in cash.  Why?  Because you will make better financial decisions – like the car example I gave earlier.  It will also help you avoid overextending yourself on credit cards, in case of an emergency.

7. Invest outside of retirement accounts – this isn’t the most tax advantaged way to save.  But it is also the best way to feel like you aren’t saving EVERYTHING for a distant future.  Whatever your goals are, by having investments saved up outside of retirement accounts – it creates flexibility for you.  It helps ease your mind that you have savings accounts you can access at any time.

By following these simple steps, you can avoid lifestyle creep and keep your finances in great shape.  It is a very easy trap to fall into, but as you can see – it is an easy trap to avoid.  You just need to be more mindful of how it ha[[ens and the consequences.

Please comment below with your favorite solution to lifestyle creep.

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