Lifestyle creep is the #1 reason the majority of high-income earners still live paycheck to paycheck. Their discretionary income just seems to go poof and vanish into thin air.
If you don’t know what lifestyle creep is, it’s something that should be at the top of the things you should avoid.
I would know, because I fell into the trap earlier in my career.
And it wasn’t easy to get out of the trap, but it was so worth it.
Save Yourself From Financial Ruin
Want to stop living paycheck to paycheck? Want to build wealth quickly?
Avoiding lifestyle creep will be as important as making a budget and increasing your income. They often work hand in hand.
In the medical world, you’ll often hear about someone who develops a strange cough. But they don’t get it checked out even though they’ve been coughing up blood for weeks and are losing weight.
After a year of this, they’ll finally see a doctor and learn they have stage 3 lung cancer. Something that might have been avoided if they would’ve gotten checked out after a couple of weeks of those symptoms.
Lifestyle creep is like a cancer. The longer it goes untreated, the worse it gets.
What Is Lifestyle Creep or Lifestyle Inflation?
Lifestyle inflation, also known as lifestyle creep, is the steady increase of expenses as your income rises. Little by little, your spending increases incrementally while you barely take notice.
You go from buying the 75 cent bananas to the $2 organic bananas at Whole Foods, even though any banana is healthier than the majority of the junk you normally eat.
That $1.25 difference seems harmless or insignificant, right?
But then you upgrade your car and you think the extra $200 a month isn’t a big deal.
You didn’t even consider that your car insurance will go up, the higher octane gasoline will cost more, and the maintenance will also be more expensive.
You even end up taking the car to the car wash more often because you want to keep it looking new.
Suddenly you start buying nicer shoes. And you move into a bigger house even though your family stayed the same size and you didn’t actually need more space. Slowly over time your spending habits got ingrained into who you are as a person. You’re a spender not an investor.
The changes are so gradual and you quickly adjust and get used to the nicer things so you barely notice. Until it’s too late.
How Does Lifestyle Creep Start?
As a broke college student, you probably kept your expenses pretty low. Living with a couple of friends was the norm, and cheap meals were clutch. Cheap beer? No problem.
After you got your first job paying a salary of $40,000, you finally had more income and you might have moved into a nicer place. Maybe you also used some of that money to eat at restaurants more often.
Even though you were making more money, you didn’t learn how to invest or open a high yield savings account.
Fast forward five years and you might have gotten a couple of promotions and raises. Now you’re making $65,000, which is pretty awesome. The only problem is that you still can’t seem to save any more money than you used to, even though you make 63% more. What is happening? Why is your savings rate dropping while your income rises? Where is the extra money going?
You just got played by lifestyle creep. In truth, you just played yourself.
You aren’t any happier and you have nothing to show for it besides junk you never use and a credit card bill that terrifies you.
We’ve all had the boss that makes way more than you do, but still lives paycheck to paycheck. He’s paying for the new car, the big house, the fancy gym and golf club membership, and maybe even private school for the kids.
We can’t forget those fancy vacations. His retirement savings are nowhere near where they should be to sustain his lifestyle. Each expense just seems to add up.
From the outside, the problem is so obvious, yet the person making the choices seems blind to the problem.
At this rate he’ll never be able to retire and will have to work for the rest of his life, even though his salary is high enough that he should be wealthy by now.
That’s insane, right?
You can do better than that. You need to do better than that.
Why Is Lifestyle Creep So Important?
Just think, you were once able to happily live off of $40,000. You now make $65,000 per year. If you just lived off of the $40K you’d be able to save an extra $25,000 per year! If you saved those $25,000 per year and were able to invest it at a 7% annual return (which isn’t crazy), you’d have nearly $350,000 after 10 years!
That’s the power of compound interest.
The reason that limiting lifestyle inflation so important, and what makes it so incredibly dangerous is that it slowly creeps up on you, without you realizing it. You’re able to rationalize each small purchase, but once they all add up, you’re suddenly accustomed to spending that extra cash.
Little by little, your spending increases as you make more money. You barely notice it and it happens incrementally. You still save the same amount of money every year, so you think you are doing okay.
But you’re not doing okay. You could’ve amassed a small fortune if you hadn’t increased your spending.
Lifestyle creep is so important because it prevents you from achieving financial freedom and reaching your dreams. It prevents you from living your best life and providing more for your family. From you being able to ever retire and pursue your dreams.
But Wait, Isn’t It Good To Be Able To Enjoy My Money Now?
Absolutely!
Increasing your quality of life is a beautiful thing, and something to be very proud of.
But most people increase their spending as their pay increases, without being thoughtful about the way they are spending.
This means that they have less money to save and invest, but are not actually happier, or better off. Their money essentially disappeared.
They have nothing to show for it except for a garage full of junk.
Believe us, the new pair of pants that will sit in your closet forever won’t actually make you more happy.
The 2nd reason that lifestyle creep is dangerous is that it’s so hard to reverse. If you grow into a routine of stopping to pick up food on the way home from work, cooking will begin to become even more painful than it already was. Eventually, even the thought of making something as simple as a sandwich will suck.
When I first started working in New York City, my company bought me dinner every night since I would often work past midnight. After a while I got so used to it that it took me nearly a year to adjust to making my own dinners. It’s crazy, but humans are insanely good at adapting. So you have to be careful what you get used to!
Unless, you already have enough money to retire, stop eating your money and then flushing it down the toilet.
As soon as the things that you used to think were luxuries become your new normal, it’ll be that much harder to go back to the basics.
Before you realize it, you can’t imagine having a burrito bowl without paying ‘a little extra’ for guacamole. Okay fine, guac is pretty amazing and might be worth it, but you get what I mean.
Here Are Some True Example Of Lifestyle Creep That You Won’t Believe
Luxuries Turn Into Necessities
When I was working on Wall Street in New York City, I’d occasionally have to travel with my team to meet with clients. As an analyst, I’d go so that I could create presentation materials, corporate valuation models, and make PowerPoint slides. The 100-hour workweeks were A LOT less glamorous than they seemed before I started.
A few times, we’d travel with clients and we’d all fly together on the client’s private jet. Perhaps we were going to see a factory or manufacturing facility they were interested in purchasing.
Flying between big cities, there were tons of commercial flights available. So why did they need to fly on a private jet?
When I asked, the client said he had gotten so accustomed to it that he refused to wait at the airport due to the long lines getting through TSA.
Flying on a private jet was pretty sweet. You don’t have to go through security. You show up for the flight whenever you’re ready to leave and the plane takes off right away. No delays. No hassle.
Now imagine going from that to flying coach or business class on American Airlines, where the baby next to you is drooling on your shoulder.
Even though I only flew on the corporate jet a handful of times, it became crystal clear how you could easily get used to this way of traveling. The only problem is that those flights cost a fortunate at about $15,000-$25,000 per hour.
Yikes.
The Fisherman And The Businessman
Another fantastic story that is relevant is the fabled fisherman who is approached by a businessman while he’s sitting on a dock sipping a beer and fishing.
The businessman asks how many fish he catches a day and what he does with them.
The fisherman tells him that he catches a dozen but throws most of them back into the water. He keeps the biggest ones to feed his family and sells a couple at the market to make enough money so that he doesn’t have to have a traditional job.
The businessman is floored and tells him that he should hire a 2nd fisherman, keep all of the fish he catches and export them up North where fish sells for a premium.
Then he can take the profits and invest in a larger boat so he can increase his production.
After a few years he’ll be able to afford a fleet of boats and build a fishing empire.
Confused, the fisherman asks the businessman why he would ever want to do that.
The businessman responds that eventually he’ll have enough money that he can stop working and sit on the dock all day sipping beer.
The businessman’s enthusiasm died as the realization came over him that the fisherman was already living his dream life. I think most of us can relate a little bit to that story.
Have I Personally Fallen Victim To Lifestyle Creep?
Yes! It’s painful to admit it but it’s true. I am human.
It’s natural to want to increase your quality of life. And growing up poor I never knew what it was like to be able to buy myself things regularly.
While Francisco has done a really good job of always keeping his expenses lean and mean, I couldn’t always say the same thing.
After moving to NYC after college (the decision to move to NYC in and of itself had many implications on my expenses), I was able to keep my rent modestly low.
I moved in with 2 roommates into a 2 bedroom apartment and I lived in the living room to save money.
But things changed pretty quickly.
After a year, I decided to move into my own studio apartment so that I could live alone and enjoy the freedom of adulthood. After all, I was 23 and was making over $100,000 a year, so I didn’t think it was a big deal. I felt like I had earned it. Yikes.
That’s the way lifestyle creep works. The higher expenses don’t seem like a big deal. Until they are.
After living there for two years and realizing that it was hampering his ability to save and invest for retirement, Camilo moved in with a former college roommate into a small apartment in Times Square.
On TV, Times Square looks pretty awesome, but it’s one of the most affordable neighborhoods in Manhattan because the locals want to avoid living near the throngs of tourists at all costs.
But that simple decision to move back in with a friend cut his rent bill by $500 a month, or $6,000 per year! That alone was more than enough to max out his Roth IRA every year. He also ate more meals at home, and spent less money on groceries, internet, and utilities since he had someone to split them with. Cha-ching!
The best idea was probably switching to a low-cost phone carrier like Mint Mobile or Cricket Wireless. You literally get identical phone service for a fraction of the cost…
Was it fun, to go back to living with a roommate? It actually kind of was!
Living alone was great, but it was also nice to have a friend to make dinner with and hang out with. Sharing an apartment or house with friends is a small price to pay for the ability to retire a few years earlier! Just make sure you pick your roommates carefully!
How Do You Avoid Lifestyle Creep?
Avoiding lifestyle inflation is key if you want to accelerate your path to financial independence, pay off debt, or reach ambitious financial goals.
The #1 thing you can do to avoid lifestyle creep is to increase the amount of money that you invest. The more stocks and other investments you are buying, the more money you will have and the less you’ll be using to buy things you don’t need. It’s a win-win and investing is the fastest way many people build their fortunes.
You can use apps like Robinhood, Betterment, M1 Finance, Webull, etc. to get started. Pick the app you feel the most comfortable with and start investing. The key is to buy and hold for long periods of time. The longer the better.
Here are other strategies that we’ve seen have been the most successful:
1. Create A Budget
The first step is to create a budget. Tracking your spending over time is an amazing way to see patterns that you didn’t realize existed. Seeing the total of all of those Lyft and Uber rides will be a wakeup call.
When creating your monthly budget be critical of every dollar you spend or save, and identify the things that actually bring you happiness.
It doesn’t matter if you already save a lot of your money or earn a lot. You should still use a budget. It’s a no-brainer and you’ll be glad you started doing it. Again, tracking your spend is the critical piece here, and you can use an app like Mint or Personal Capital to do that.
2. Prioritize Experiences Over Objects
Research has shown that all things equal, experiences bring you more sustained happiness.
By cutting out a lot of the junk you purchase, you’ll also free up a lot of cash to save and invest.
Sit down and make a list of the things that make you the most happy and focus on those. It likely won’t be your handbags.
3. Keep Your Expenses Fixed After You Get A Salary
If you move decide to combine finances with a spouse, get a promotion, or get a higher paying job, don’t let your expenses rise. Cap them at your previous level.
If you get a 25% raise, it’s okay to spend a little more, but save the majority. Increasing your budget by 10% still allows you to save 90% of the increase in wage.
For those who are newly married, one amazing target to shoot for is to save 100% of one of your salaries and live off of the other. This will ensure that your lifestyle doesn’t go crazy when your income doubles (as a couple).
If you are a recent college grad, keep your lifestyle similar to when you were in college for as long as you can. Try to live with friends, don’t go to expensive dinners all of the time, and find creative ways to go out without breaking the bank. Saving at the beginning of your career can make a huge impact when you are ready to retire.
You can do this and building these habits early will help you a lot.
4. Develop A Side Hustle And Save All Of That Income
An increasing number of Americans are reporting that they have a side hustle, or an alternate source of income. If you don’t have one yet, find someone you know who does and have them show you how they do it. It might be as simple as dog sitting on Rover.
The average side hustle in the U.S. generates $686 per month, which would give you over $8,200 extra dollars per year. The important part is to remember to save this, and not just increase your level of spending (which is the easy thing to do).
5. Cut Your Redundant Expenses
There’s a few things you are likely paying too much for.
The first is your phone bill. Switch to Mint Mobile or Cricket Wireless as soon as you can.
Another place to cut is your TV bill. You can get so many cheaper alternatives online (like Netflix and YouTube TV).
Finally, shop around to make sure you aren’t overpaying for car insurance. These monthly bills add up! The last thing you need is to rack up credit card debt when you are trying to build wealth.
6. Don’t Move Out Of Your Home Until You Physically Outgrow It
Increasing your mortgage or monthly rent bill is a good way to have less money. So don’t move out of your home unless you literally have to or you are running out of space. Moving to a new neighborhood to get your kids into better schools is a legit reason. Doing the same thing because you want to impress your family is not. Be smart.
7. Don’t Go Broke Trying To Keep Up With The Joneses
If there’s one thing we’ve learned over time, is that the easiest way to be unhappy and spend your money foolishly is to compare yourself to others.
All of a sudden, flying to Mexico for vacation seems a lot less fun when you know someone else is flying there first class and staying at the nicer resort next door.
The good news is that none of that stuff matters. None of it. Who cares what anyone else is doing? Just enjoy the fact that you are going on vacation to Mexico, which is amazing!
Stop comparing yourself! Just do your thing.
The second you stop caring about what others are doing, or what they have, will be your first second of freedom. No one will care about you as much as you do, so you need to focus on yourself and your family.
Do you have other tricks to avoid lifestyle inflation? Comment below and let us know!
Camilo is a personal finance expert and the Co-Founder and CEO of The Finance Twins. I was raised in poverty by a single mother and had to learn everything about personal finance on my own. I have been featured on Forbes, Business Insider, CNBC, and US News. Earlier in my career, I worked as an investment banking analyst on Wall Street at JPMorgan Chase & Co., and I have an M.B.A. from Harvard University and a B.S.E. in finance from the Wharton School of the University of Pennsylvania.