If you don’t know what lifestyle creep is, it’s something that should be at the top of the things young professionals should avoid. If you already suffer from it, you need to get it taken care of ASAP!
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 seems harmless.
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 grade gasoline that the new car requires will cost more, and the maintenance will also be more expensive. Suddenly you start buying nicer shoes.
But 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.
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?
We’ve all had the boss that makes way more than you do, but still complains about living 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. 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.
Why does lifestyle creep matter?
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!
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.
Is It Bad To Improve Your Standard Of Living?
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.
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.
Unless, you already have enough money to retire, stop eating your money and then flushing it down the toilet.
Once the things that you used to think were luxuries become the standard, 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.
Here’s An Extreme Example Of Lifestyle Creep
When Camilo was working at J.P. Morgan in Manhattan, he’d occasionally have to travel with his team to meet with clients. As an analyst he’d go so that he could take notes, create valuation models, and make powerpoint slides. The 100-hour work weeks were A LOT less glamorous than they seemed before he started.
A few times, they’d travel with their client and they’d all fly together on the client’s private jet. Flying between big cities, there were tons of commercial flights available. So why did they need to fly on a private jet? The client had gotten accustomed to the high life and refused to wait at the airport due to the long lines.
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 on American Airlines, where the baby next to you is drooling on your shoulder.
Even though Camilo only flew on the private 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 $15,000-$25,000 per hour.
Have We Fallen Victim To Lifestyle Creep?
Absolutely! We are human. It’s natural to want to increase your quality of life. The problem comes when you spend everything you make without actually improving your standard of living (no, those sneakers won’t actually make you more happy).
While Francisco has done a really good job of always keeping his expenses lean and mean, Camilo 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 his expenses), Camilo was able to keep his rent modestly low. But things changed pretty quickly.
After a year, he decided to move into an awesome studio apartment so that he could live alone and enjoy the freedom of adulthood. After all, he was 23 and was making over $100,000 a year, so he didn’t think it was a big deal.
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!
Was it fun, to go back to living with a roommate? 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 so important if you want to accelerate your path to financial independence, pay off debt, or reach ambitious financial goals. Here are the strategies that we’ve seen have been the most successful:
Create A Budget
The first step is to create a budget. Tracking your spend 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.
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.
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 the majority 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.
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.
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).
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 sh*% 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!
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.