You pull into your driveway, exhausted and upset. It’s been a rough day at work. Lately, you can barely tolerate your job and dread leaving the house each morning. But quitting just isn’t an option right now.
You look up at your large house, with its perfect lawn, and it hits you.
That house is part of the reason why you can’t quit. You look down at the dashboard of your car- the one you are making high monthly payments on.
What happened? How did you get yourself into this?
Blame lifestyle creep.
Lifestyle creep, the thief that sneaks in and steals your options
Lifestyle creep, or lifestyle inflation, is the tendency to spend more as you earn more. What you once thought of as wants are now considered needs. As time goes on, you probably don’t even notice that your additional income is eaten up by new expenses, it just seems to happen automatically.
Preventing lifestyle creep is essential because the only way to achieve financial independence or any degree of freedom in your financial life is by saving money. And the only way to save is to spend less than you earn.
Increasing your income is an excellent strategy for financial independence, BUT it only works if those additional earnings are channeled into savings. Otherwise, lifestyle inflation will erode the strides you’re making with increased earnings and undermine your ability to save.
Plus, as you increase the amount you spend, you also increase the amount you’ll need in savings if you ever want to stop working. A rule of thumb is that for every dollar you spend, you need at least 25 times that in savings to fund that expense on an ongoing basis. Lifestyle creep pushes the goal post out further and further.
Lifestyle creep is different than cost-of-living inflation, which is mostly beyond our control. When the cost of groceries increases, you need to spend more to eat. You can substitute less expensive items, but overall, there is only so much you can do.
Instead, lifestyle creep starts with discretionary or optional expenses. For example, you may need a car, but the type of car: luxury, economy or something-in-between, is entirely discretionary. Even if a discretionary expense feels important to you, be aware of the trade-off you are making with your future.
So what’s the solution? Let’s start with five ways to prevent lifestyle creep from stealing your future freedom.
1. Pay attention to your expenses by creating a spending plan
Avoid spending on autopilot. Lifestyle creep happens when we aren’t paying attention. The antidote? Create a spending plan or budget. Track your spending and compare it to what you spent last year. If it is increasing, look into why.
To illustrate this, see how in the graph below, expenses shot up from year 4 to year 5? Income increased too, but not by as much. This signals lifestyle creep in action.
Often, just being aware of what you are spending can help you lower it. Awareness is a powerful tool when it comes to personal finance.
2. Automate savings
Plan on automatically saving a percentage of any additional income you may earn throughout the year. Then set aside those savings in a place you won’t touch.
For employees with 401(k) plans, increasing your contribution automatically every year is an effective strategy. Some plans allow you to increase your contribution by a set percentage, say 2% every year and will increase this for you, so you don’t even need to think about it.
If you don’t have a 401(k), make it a priority to set up your own retirement plan and as you earn more, increase the amount you set aside. If you don’t see the money just hanging out in a checking account, you won’t be tempted to spend it.
Automating savings to the greatest extent possible takes us out of the equation and gets it done.
3. Think about your future before you sign up for another loan
Going into debt is a dangerous cause of lifestyle creep. The luxury car or the bigger house that you just need to trade up to now that you can afford it are two of the worst offenders. They lock you into a higher expense level and the need to earn at the same rate until the loan is paid off. Debt reduces your options in life.
Interest is expensive and doesn’t add to the value of your purchase. In fact, with consumer debt, you are paying for something that is decreasing in value over time. You’re paying more and getting less. This is no way to build a future.
In purchasing a bigger or fancier house, additional debt is only the beginning. Not only do you have a higher mortgage, but bigger houses cost more in utilities, property taxes, insurance, furnishings, and maintenance. Look into the additional costs before you sign mortgage paperwork and see how this will affect your spending plan.
4. Be mindful of the influence of your peer group
It is much easier to spend less when you hang out with people who make saving money a priority. Start paying attention to the influences in your daily life.
When you hang out with friends who spend a lot of money, be aware and try to resist the pressure to spend more yourself, especially on things that don’t really matter to you.
This may be obvious, but when you watch TV, remember this is fantasy, NOT reality. These people are not your peers, this is not how ordinary people live; not even close. You are looking at a skewed version of life. This applies to social media as well.
5. Avoid recurring membership payments
Think twice before you sign up for any new service that requires recurring payments. Gym memberships are a famous example of this. There’s nothing wrong with paying for a service you use or enjoy, especially if the expense is in your spending plan. But recurring payments for things you don’t use are a complete waste.
To put it in perspective, look at the yearly cost, not the monthly payment. Then take the yearly cost times 25. This is the amount you need to save to fund this expense when you decide to stop working.
Preventing lifestyle creep is easier than curing it. Wherever you are right now in your financial journey, do what you can to prevent it from getting worse. Then you can turn your attention to reducing your current expenses.
Preventing lifestyle creep can as simple as paying attention. Don’t let your spending go on autopilot. If something is critical to you and the expense is reasonable for your plan, go right ahead. Just make sure it is a conscious choice.
What you really deserve is a future in which you don’t need to worry about money. True happiness comes with choices. And the more money you save, the more choices you will end up having later on in life.