What is Lifestyle Creep and How to Stop It

Is this your biggest income-earning year to date? Do you deserve to spend that big bonus as a down payment on a luxurious vehicle after all the long hours you put in to earn this higher income?  

The answer is yes and no. We all want to treat ourselves, but where do we draw the line? After a raise or bonus, if you cannot identify a monthly spending limit and expenses increase every paycheck or more, lifestyle creep has taken over.

What is lifestyle creep?

Lifestyle creep is a behavior used to describe when consumers spend more on nonessential purchases as their disposable income rises. Sometimes also called lifestyle inflation, it means as your income grows, your spending matches or outpaces that growth, leaving you with increasing bills at the end of the month.

After receiving a bonus or a raise, higher levels of disposable income arise. Therefore, you can now afford to reward yourself with lifestyle upgrades:

• Traveling more frequently
• Buying designer clothing
• Going out to eat more at higher-end restaurants
• Trading in your vehicle for a luxury brand
• Buying the newest cellphone

As time passes, you become accustomed to this upgraded lifestyle and continue to expect more indefinitely.  

Those not financially disciplined tend to continuously overspend, especially during high-income years and times of rising inflation, when most essential and nonessential goods and services cost more than in the past. If saving money is not a priority, your future self will not benefit from the hard work you put in to earn that raise. Suppose your bonus is revoked due to a decrease in company performance caused by events such as a global pandemic. In that case, settling for a more reserved lifestyle will be challenging. Short-term signs of lifestyle creep include increasing credit card debt or taking out loans to maintain possession of these material goods. Long-term impacts could mean that you must work longer to retire comfortably.

How to Avoid Lifestyle Creep

Before you can stop the pattern, you need to understand your means. Start by listing all reoccurring monthly expenses and savings to identify what amount is required to cover your bills and obligations. After you pay all essential expenses, the next step is to quantify the disposable income left for your discretion. Quantifying how much you spend each month or year can be challenging, and that is why saving first can help you back into this number.

Set Short and Long-Term Goals

Start with short-term goals because they tend to be easier to quantify. For example, you want to take a cruise next year and know you will need $5,000 to book your trip. Starting with these goals can help you identify wants versus needs in your savings plan. Next, consider your long-term goals. This can be challenging as they often do not have a set price tag. Common long-term goals include saving for a down payment on a home or building retirement savings. These big-ticket items can be overwhelming and hard to navigate or even recognize where to begin.

Consider Your Spending Behavior

By listing your goals, you gain an understanding of what is important to you. Are you saving enough to meet these goals? What may be impacting your savings? The obvious may be your shopping habits. Is everything just being swiped on the credit card without any thought of the price? If so, you’re not alone. Impulse shopping and revenge spending are rising, with shoppers spending over $300 a month on spontaneous purchases. While you may get a brief dopamine rush when you submit your purchase, does it align with your goals, and is it the wisest financial decision? Having intention behind your spending can help limit overspending on nonessentials. NPR’s Life Kit suggests using a “Buy List” to curb impulse spending and keep yourself on track.

Seek Professional Financial Assistance

By working with a CERTIFIED FINANCIAL PLANNER^TMpractitioner, you can identify if you are on track for your financial goals and milestones in life, which go beyond the month-to-month household expenses. They can help you understand your missteps and control your lifestyle creep. Some things to consider with a CFP® include:

• Do I have enough saved for my child’s college tuition?
• At what age do I wish to retire versus at what age can I afford to retire?
• Can I pay for a family vacation?
• When can I comfortably purchase a vacation home, and at what price?
• How much does it make sense to give to charity this year?

There are many ways to save and invest for life events, and a CFP® professional can help you understand the impact of each decision.

Develop a Coordinated Plan

By working with an industry expert, you can determine how best to allocate your increased disposable income and utilize tools to keep you disciplined. It is essential to understand how to maximize savings opportunities to ensure your dollar goes farther and works smarter.

• Are you maxing out your retirement savings?
• Is your retirement plan set to auto-increase as your income increases?
• Do you have a college savings plan established?
• Are you taking advantage of your employer benefits?
• Does your savings account cover unforeseen expenses?
• Is my insurance coverage appropriate?
• Are my savings automatic every paycheck?

These questions can be answered and explored through your personalized financial plan.

Review Your Plan of Attack

Life never stays constant, and unforeseen occurrences can impact your plan positively or negatively.  Or you could get sidetracked by the busyness of life and fall off track from your plan. That is why having a financial advisor who keeps you focused and organized and does the footwork for you will enable you to enjoy the fruit of your hard work.

Knowing that all facets of your financial life are being reviewed regularly by an industry professional can give you the peace of mind that your intentions are on track to be successful for generations to follow.

Comparison is the Thief of Joy

Now you may be asking yourself, why is it so hard to follow if this is an easy concept to understand? We are humans and make thousands of decisions daily, some good and some not-so-good. Temptation and peer pressure are ever-rising. With social media, we compare ourselves to others daily, and we want those around us to see us as successful.  We often quantify success by material goods because those are visible to the outside world.  For instance, we may want the newest version now, even though there is nothing wrong with the one we currently own. Or, we might want to stay at a 5-star hotel for the location and pictures we can post online to show others the extravagant places we travel to, even though more affordable options provide the same level of internal satisfaction.

Simple Prevention: Save First and Spend Second

To prevent lifestyle creep from taking control, save first and spend second. Regularly revisit and reevaluate your goals and financial picture to stay focused. That doesn’t mean we fail if one decision knocks us off track with our plan. Recognizing the importance of discipline and reliability can give you the toolset to mend lifestyle creep. Staying in control of your financial life provides a foundation for lifelong happiness rather than temporary satisfaction. Small changes now can create impactful results for years to come.

Author: Courtney Collins, CFP® | Allegheny Financial Group | December 2022

The information included herein was obtained from sources which we believe reliable.

Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered Broker/Dealer. Member FINRA/SIPC.

Sources:

Lifestyle Creep Definition (investopedia.com)

Why Choose a CFP® Professional | CFP - Let's Make a Plan (letsmakeaplan.org)

Shoppers Spend Over $300 A Month on Impulse Purchases (CNBC)

NPR’s Life Kit