Until recently I had not heard of the term lifestyle creep. What is it?
Lifestyle inflation refers to an increase in spending when an individual’s income goes up.
It tends to be triggered with major events in our lives. For example, graduation from university, entering into the workforce, a job promotion, or a significant pay raise.
One of the dangers of lifestyle creep is that it can occur gradually, in line with events like raises and promotions over the course of your career. As a result it’s insidious and often goes unnoticed.
When you first graduate from university, you go from subsisting on packet noodles and canned food to seeing a fat paycheck hit your bank account each month. All of a sudden, you can afford to buy stuff and go out to eat, it’s very tempting to splurge.
Once we get a promotion or raise and as work stress and responsibilities increase, we might also be tempted to spend more. After all, we’re working so hard, don’t we then deserve to buy a new car, handbag, pair of shoes or go fine dining?
Now, there is nothing wrong with enjoying life’s finer things.
The only issue is that it can easily lead us to fall into a trap of spending more, living paycheck to paycheck, incurring debt and saving less for retirement. I came across a great example of this in a recent article in the AFR.
The story was about a couple of partners at a top tier law firm, who had defected to a competitor and were arguing that they shouldn’t be subject to a six month non-work period, which would cause them to suffer financially. Some snippets of it are below
For instance, Quinn gave evidence he has monthly expenses of about $45,000, which include $15,000 mortgage repayments, $9000 school fees, $6500 payments for two family cars and credit card and living expenses of up to $15,000. He lives in a four bedroom, multi-million dollar mansion in Melbourne’s prestigious suburb of Toorak and his wife is currently not working.
Clark said he is sitting on a debt of more than $3.5 million, and he will have to pay $20,000 per month for living expenses including “food, utilities, insurances and up-keep of properties” on top of private school fees and financial support for his dependent parents.
Meanwhile, Muller gave evidence he has to pay more than $35,000 a month in living expenses, school fees and debt repayments. He said: “I am very concerned that I may be forced to sell assets to avoid defaulting on my current debt obligations and in order to meet my financial obligations.”
So how do you avoid lifestyle creep?
- Value experiences over buying things
Experiences with our loved friends are likely to create lasting memories and bring more joy than the instant sugar hit that comes with an expensive purchase. We’re also less likely to then feel the need to ‘trade up’ in line with those around us. Keeping up with the Joneses can be expensive.
Recently, I’ve noticed a pattern of car upgrades amongst our friends – to Audis, BMW’s and Mercs. I know because I have seen these cars on my social media – the car at the park, the dashboard (with the logo showing of course).
2. Budget and Plan
Having a budget is a great way to have accountability over your spending and to see where your money goes. It is also good to keep your spending in check as your income grows.
We have a monthly budget that is pre-planned before the financial year.
Every month I literally go through our bank statements line by line and plot everything into categories. There is a category for ‘discretionary spending’ (or Splurge in Barefoot Investor terms).
For us, that Splurge item used to be over $1k a month before we discovered FIRE. It is now about $300. I wouldn’t say we are less happy now because we’re scrimping, it’s just that our focus has changed.
3. Practice Delayed Gratification
If there’s something you want to buy – write it down somewhere, but don’t buy it. Wait 30 days and then look at your list again. If at that point, you still want the item, then go ahead and buy it.
Chances are, you probably forgot you wanted that item in the first place!
We live in a society of hyper consumerism. We’re bombarded with advertising that tries to tell us what we need.
Research has shown that the gratification from money diminishes at a certain point, known as the saturation point. Beyond this point, happiness levels are about the same, and not increasing with additional spending.
For us personally, I think everyone starts off or inevitably experiences lifestyle creep. I know I did when I lived and worked overseas in a stressful, demanding job. I’ve wanted to buy a new car or new clothes after a promotion or raise. Sometimes I’ve caved. No one’s perfect but recognising lifestyle creep for what it is, is the first step towards fighting it.