Lifestyle creep affects the affluent as well as the poor. It shows no favor. It saps your finances and prevents you from achieving your goals. All too often, you’re not even aware it’s happening.
Lifestyle creep is a major financial problem you might not know exists. Those in control of their finances, however, are aware of lifestyle creep, understand how it works, and are able to avoid its traps.
The major symptom of lifestyle creep is gaining in income but not getting ahead.
This is an all-too-familiar scenario. You get raises and increases in income, yet it remains just as hard to save or pull ahead as it did before. And not just once; it happens year after year. The income goes up and up, and the leftover income remains at nothing. That’s what lifestyle creep looks like when you’re caught in its grip.
From the individual view, lifestyle creep seems to be simply that expenses expand to fit the income. You make a little more, expenses trend up, you remain in the same place. But it’s more than that.
Lifestyle creep is more than your expenses expanding to fit your income. Lifestyle creep happens as you increase your expenses due to increases in income. It may be in the form of a more expensive residence or vehicle, or it may be in the form of more expensive travel and entertainment.
Lifestyle creep is the result of moving your lifestyle up in relation to increases in income. Lifestyle creep absorbs not only increases in wages but real wage growth.
Wage Increases vs. Wage Growth
When you receive a cost-of-living increase in wages, there’s no growth. A cost-of-living increase adjusts your wage to keep pace with the increase in the cost of living.
It enables you to keep doing the things you were doing before without slipping backward.
If you never received any increase in income, things would slowly become more and more difficult financially. Increases in expenses that you can’t control would force you to reduce in other areas to stay afloat. Your standard of living would decrease as your budget was slowly taken over by necessities.
Cost-of-living increases enable you to keep up with increasing expenses. They don’t enable you to get ahead. They’re not designed to do that.
Wage growth occurs only when you have an increase in income that is greater than the increase in the cost of living. Let’s look at some examples to help make this clear:
If inflation during a year is at 3 percent and you get a 3 percent raise, you are in exactly the same place as before. You can only continue to buy what you bought before; the cost of things has increased by how much more you make.
If inflation during the year is at 3 percent and you get a 5 percent raise, you have real wage growth of 2 percent. Of your 5 percent raise, 3 of those 5 percentage points go to the increased cost of doing the same things. That leaves 2 percent, which is really more to spend; you have 2 percent of real wage growth.
Often real wage growth occurs with promotions or job changes. Many companies provide cost-of-living increases or minor merit increases that are either equal to or only slightly above inflation. These don’t move you forward. You need to increase your income by the rate of inflation just to keep pace with increased costs.
Wages and Lifestyle Creep
There are a couple of ways lifestyle creep forms from wage increases.
One is believing that a cost-of-living increase is real. It’s not. If you get a raise that is approximately at the current rate of inflation, you have no more available for discretionary expenses. It may seem like there’s extra, but spending that will quickly lead to trouble.
The other is getting a real increase in wages and adjusting lifestyle to meet that. There may be justification of needing to go out more, of needing a vacation, of needing a bigger place.
Justification is a trap.
Justification occurs when we perceive luxuries as necessities. Justification occurs when we make needs out of wants. That doesn’t have to happen.
Alternatives to the Creep
Lifestyle creep is optional. You don’t have to go through it. You don’t have to live year after year getting increases in income without getting any further ahead.
It’s all about awareness and choices.
Many people who suffer the effects of lifestyle creep aren’t aware that it’s happening. It’s hard to see when you’re in it.
If you’re aware of it, it’s not hard to prevent it. What separates financially literate people from others is largely being intentional with their money. If you’re intentional with your money, you can avoid lifestyle creep.
Step number one is to know this trap exists. It easy to spot it in others. You have probably seen people move up the corporate ladder only to still be broke, just broke with more stuff.
When you receive an increase in income you should be intentional. There are a couple of specific steps you should take.
Steps to Combat Lifestyle Creep
The first thing that should happen with any increase in income is that you should pay yourself first. This means that you should increase contributions to your savings and investment plans to fund your long-term financial well-being.
The second thing that should happen is that you should wait. Let’s look at what marketers do.
When organizations market to you they try to get you to take action immediately. They offer incentives, such as discounts and sales, to try to induce you to take action without delay.
The key here is understanding why they do this. It’s not that they are caring for your well-being. They understand that most people who won’t buy immediately won’t buy after giving consideration to the purchase.
Simply put, give most people an opportunity to think through spending money on something and they won’t do it — at least not immediately and impulsively.
Time between thinking you might want to spend money and actually spending the money allows you to make decisions that better align with your long-term interests. You’ll make better financial decisions moving slowly.
Naturally, there’s a tool that helps you do this. Some people call it a budget. Others call it a spending plan. Either way, using this type of tool helps you be intentional with your money and make better decisions to support your long-term self-interest.
Lifestyle creep robs many people of having a comfortable future. Keeping up with the Joneses may feel good in the short-term but it’s never a good basis for a financial decision.