In one of our other articles, we touched on the topic of lifestyle creep.
The term refers to a gap in personal budgets that arises when one’s income rises very suddenly. Understanding lifestyle creep is one of the keys to not experiencing sudden financial disappointment at some point in your life.
If you face the happy prospect of a better new job, a big promotion, or a long-term business windfall, keep reading.
In this article, we will go over the specifics of lifestyle creep. We will delve into how it works, when it’s most likely to occur, and what you can do to avoid its worst consequences.
Lifestyle creep is sometimes referred to as “lifestyle inflation”. Indeed, seeing lifestyle creep as a type of inflation makes sense.
Lifestyle creep is a common pattern seen among people who suddenly bring in a significantly larger income. After receiving a promotion, a new job, or experiencing a sudden increase in your income for any reason, you are likely to spend more as you earn more.
If you aren’t careful, lifestyle creep will indeed creep up on you. It normally happens over time as you become accustomed to a higher discretionary income. Signs of lifestyle creep include:
Most importantly, there is one serious sign of lifestyle creep you cannot take lightly:
Despite earning far more in income, you aren’t saving or investing more and are left with the same amount of money at the end of the month.
So, while more income is always great, and a better lifestyle isn’t something to complain about, you need to pay attention to your spending habits.
Long-term, you likely still want to get a comfortable home and achieve a comfortable retirement. If you’re no closer to that goal despite recently making far more money, you are a prime example of lifestyle creep.
Only vigilance can help you avoid lifestyle creep.
To avoid the phenomenon, the first thing to remember is to keep a budget. Whenever your income changes, re-evaluate your budget. In fact, your budget should be re-evaluated whenever there are significant changes to your finances, whether they be related to income, expenses, or economic trends.
When you get a promotion, a celebration is in order.
But once that celebration is over, it’s crucial to sit down and crunch the numbers. You’ll want to find out exactly what the increased income will mean for your lifestyle. Without such thought processes, it’s easy to simply spend more because you have more and end up without any additional savings:
Next, we have to consider the relationship between income, age, and lifestyle. Americans tend to reach peak income around their mid-50s. Naturally, this is also an age where the small things in life, the day-to-day comforts, become more important to people.
It’s fine and normal to spend more as you get older and start making more money. But again, the key is control. You can and should spend more if you earn more and improve your lifestyle. But you still need to do so within a budget.
Nearing retirement, people normally spend a lot too. It’s not hard to imagine:
So, what do you do? Well, while you are continuing to work, you are going to spend more to make the normal challenges of aging less impactful on your life. Whereas you once would be happy with very little, you now want:
Lifestyle creep can also be felt by the young.
The young are notoriously pinched by slow wage increases and higher costs for basics like housing and groceries. So, what happens when you’re in your late 20s or early 30s and you suddenly land your first amazing job?
If you’ve been sleeping on a mattress on the floor in an empty room for years, you may very well want a big lifestyle upgrade. Or maybe you haven’t had it that bad; perhaps you landed a decent job and/or lived with your parents for your early 20s.
Either way, you suddenly want to catch up on the basic comforts that your parents and grandparents could have expected. But the reality of the current costs of living doesn’t end up helping you, so you end up with the challenges associated with lifestyle inflation.
Lifestyle creep is a process that you don’t see coming. But it will manifest itself with experiences resembling the following:
June 30, 2022