Lifestyle creep happens when your spending rises with your income and you adjust to a more expensive way of living. Once you get used to a certain lifestyle, cutting back can be very hard to do.

Listen now and learn about:

  • How this sneaky financial phenomenon can derail your financial progress
  • A system that directs dollars to the things that matter to you most and keep us on track for reaching our end goals
  • Resources to help stomp out lifestyle creep

Episode

Outline

If you place your hand in a bowl of lukewarm water and start heating it, you’re unlikely to notice the rising temperature because your hand adapts to the gradual change.

Eventually, though, the water will get to a point where it’s so hot it could burn and you absolutely will notice. Even if it might not immediately register.

However, if you remove your hand from the bowl of hot water and dunk it into a bowl of ice water, you’ll notice the temperature difference immediately – and it isn’t going to feel good.

Lifestyle creep can happen to us in our financial lives in much the same way.

What Is Lifestyle Creep?

Most people get some kind of raise each year. They earn a little more than they did in the year before. Without a plan to save that raise, it’s easy to use it up by adding a few luxuries to your regular spending.

It starts with little things: adding premium cable channels, buying the more expensive bottle of wine, making more frequent phone upgrades, giving nicer gifts for birthdays, adding impulse items to your cart on Amazon, buying tickets for better seats at an event, staying in nicer hotels, paying for slightly nicer airline seating….

Each of those things individually doesn’t seem harmful – especially as you earn more and can truly afford a few luxuries. But little things have a way of adding up. Before you know it, you adapt without even noticing.

Lifestyle creep happens when your spending rises with your income and you adjust to a more expensive way of living. Once you get used to one or any of these upgrades, eliminating them is like dunking your warm hand into ice water.

It’s very hard to do.

How to Keep Lifestyle Creep from Sabotaging Your Financial Goals

Some inflation in your lifestyle isn’t a bad thing, but you don’t want the subtle upticks in your expenses to reach a point where it makes reaching your goals more difficult.

Research from the Federal Reserve Bank of New York shows that most of your inflation-adjusted wage growth (AKA, pay raises) will occur in your early working years before leveling off in your mid-career and peaking in your 50s.

Similarly, a study from the Labor Department shows that the greatest inflation-adjusted income growth comes in your 20s, but continues to grow at a declining pace in your 30s and 40s.

That tells us it’s crucial to keep lifestyle creep under control when you receive raises earlier in your career. And to keep lifestyle creep in check, you need a system that makes it easy to save your hard-earned dollars.

Both creating a reverse budget that treats your goals like bills that must be paid and automating your finances can help you avoid the type of lifestyle expansion that’s detrimental to your financial goals.

I’ve talked about the process of reverse budgeting before:

Reverse budgeting simply figures out how much you need to save, makes those savings automatic and then you spend the remaining amount of money as you please.

If you have spent your budgeted amount on restaurants, but something very important comes up unexpectedly that requires you to dine out, then you can shift spending elsewhere to fall in line with your priorities and values.

Because reverse budgeting focuses on saving, you can’t spend what you don’t have. Increasing the amount you save naturally reduces the amount you spend, but it also forces you to prioritize your expenditures.

This is important because most people find that gradually saving more allows them to cut spending that doesn’t really fit with their values. The Reverse Budget helps you stay on track towards you financial goals and it’s really easy to set up.

I have worksheets on my website that I’ll link to in the show notes, but if you download the Goal Planning Worksheet, that’s the ideal one for setting up a Reverse Budget.

You start by writing down your short-term goals (which I define as those you are trying to achieve in five years or fewer), and list the desired date of completion along with the expected cost. 

Now, if you add up the expected cost of all your goals and divide by 60 (because there are 60 months in 5 years), then you can determine how much you need to save on a monthly basis to make this happen. 

The reverse budget can help you stay on track for your goals and reduce the chances that lifestyle creep takes you off track. But, as I said earlier, you also need a system that makes it all automatic.

Automatically Escalate Your Savings (Instead of Your Spending)

I have a really popular article I wrote that I can link to in the show notes on this topic, but I want to emphasize that the benefits of automation align with the human tendency to embrace habit. In fact, more than 40 percent of the actions people perform each day are driven by habit rather than actual decisions.

Not only are we creatures of habit, but we also tend to resist change. Change requires more mental effort, which our brains are hardwired to avoid. Routines become automatic, but change jolts us into consciousness – sometimes in uncomfortable ways.

While automating your finances from bill pay to investing is easier than ever, few people find a way to automatically increase their savings over time. 

Many online investment platforms will allow you to increase your recurring contributions on an annual basis. Same goes for many online banks. Take advantage when you can to make saving much easier, and much more likely to actually happen. 

If this feature is not available, I’d recommend creating a recurring calendar event for January 1st of each year with specific instructions of how much you will commit to increasing your savings.

Again, you can’t spend money that isn’t there, and this automated process ensures your money, including raises, goes to your savings before you’re tempted to spend it (or before you get used to having it in your account in the first place).

Creating a System for Financial Success

Creating a system for financial success is all about making intentional, systematic choices with our money.

A good system will direct dollars to the things that matter to us most and keep us on track for reaching our end goals.

In addition, a systematic process can reduce and eliminate the human tendencies that lead to poor consumption, saving, and investing decisions – including the decision, mindful or not, to give in to lifestyle creep.

Conclusion

Another way to get a process in place that does these things is to hire an advisor. 

If you’d like to learn more about working with me, feel free to schedule a call by my Work With Me page. You can schedule a 15-minute call to find out if we’re a good fit.

As always, thanks for listening and until next time…

To long term investing!

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About the Podcast

Long term investing made simple. Most people enter the markets without understanding how to grow their wealth over the long term or clearly hit their financial goals. The Long Term Investor shows you how to proactively minimize taxes, hedge against rising inflation, and ride the waves of volatility with confidence. 

Hosted by the advisor, Chief Investment Officer of Plancorp, and author of “Making Money Simple,” Peter Lazaroff shares practical advice on how to make smart investment decisions your future self with thank you for. A go-to source for top media outlets like CNBC, the Wall Street Journal, and CNN Money, Peter unpacks the clear, strategic, and calculated approach he uses to decisively manage over 5.5 billion in investments for clients at Plancorp.

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