Financial Planning for Geeks

Let’s Talk About Lifestyle Creep

- Financial Planning

Even if you haven’t heard of lifestyle creep, I’ll bet you have a pretty good idea what I’m talking about. Lifestyle creep is the very human and potentially damaging phenomenon of increasing our spending to match our increases in income.

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It’s only natural, right? When I got my first “real” paycheck after grad school, you’d better believe I upgraded from dehydrated ramen noodles.

But before I go too far, I want to make it clear that if you are at a relatively low income level it’s reasonable to be spending most of what you make. You need food on the table, a safe place to live, and a way to get around. I see you. In this post, I’m talking about growing our spending for enjoyment rather than out of necessity. For example, we all need a place to live but do we REALLY need a 6,000-square-foot-house for the two of us?

I’m not here to judge your spending choices or make you feel bad about your house. I just want to make you aware of this insidious phenomenon so you can make conscious choices to support what’s most important to you. So here we go.

Lifestyle creep is a natural way to start out one’s financial life. We get that first job and finally have a little extra money to spend. The ramen noodles and wooden crate “furniture” get upgraded. But after a while, we don’t even think about it anymore. Eventually, the next raise means we can take TWO trips to Italy every year instead of one; hurray! The next thing we know, we’re on four international trips a year, two new Porsches, and avocado toast. Again, I’m not judging your love of travel, cars, or avocado toast. I’m merely pointing out that we rarely reach that point of “enough.”

The fact is that we Americans spend nearly everything we earn, no matter what our level of income. According to the U.S. Bureau of Economic Analysis, Americans are saving an average of 13.6% of our net disposable income as of October 2020. And please note that this rate is much higher than the historical average of about 9% since we started tracking this measure in 1959. During the COVID-19 pandemic we have started socking away more than usual, but we still trail other large, developed countries like Italy (18.6%), Mexico (21.2%), and the UK (28.1%).

Why is this a problem? Again, you can probably answer this question yourself. In general, lifestyle creep means we have to save more and more money to become financially independent, because we want to sustain our ever-expanding lifestyles. But we may also have less money to save, because lifestyle creep keeps us on that never-ending upward spiral of spending. When we’re young, we think we’ll save more once we get that next raise, but that day never comes. As we get older, we also have more obligations: kids, a house, aging parents who need help, and so on. And once we get used to the “finer” things in life, it’s hard to go back.

So what can we do about it? There are a lot of strategies for managing lifestyle creep, but the most obvious is to live well within your means. As you start earning more, resist the temptation to spend more or take on credit card debt because “I can afford it now.” Warren Buffett famously lives in the same house he bought in Omaha, NB back in 1958 and I’ll bet that’s not the only way he keeps his expenses in check. Yes, you can upgrade your house if you need to, but Mr. Buffett is a good example of the mindset we’re trying to cultivate here.

Here are some other, more specific strategies for battling lifestyle creep:

1.       To support living within your means, have a spending plan. This serves two purposes: you will get clear on what you are actually spending, and you will get clear on what matters to you. If you’re surprised or dismayed by your spending in certain categories, that’s all good information for making decisions. Please use this process to get intentional about how you spend. Cut the things that aren’t as important for you and keep the things you really value.

    a.       Spend only 50 – 55% of your gross income on fixed/essential expenses. If that number seems crazy, try working toward it. If you keep your fixed expenses this manageable, there is a lot more available to save.

    b.       Set a dollar amount (NOT a percentage) to spend on non-essentials. If you budget using a percentage, you’ll never save more as you get raises. But I do understand that this might not always feel good. It may feel like deprivation, so make sure you have this “fun” budget set aside. Please do treat yourself and don’t feel bad about it; just do it wisely and planfully.

    c.       Save 75% of every raise you get until you can save 20% of your NET income. This is just a guideline, and of course you’ll want a comprehensive financial life plan to tell you how much you need to save for when you stop working for money. But I don’t want to undersell this point, either. If you make explicit plans for every raise it’s a lot easier to avoid falling asleep on yourself and falling into lifestyle creep.

    d.       Limit how much your expenses grow each year. Keep your personal spending “raise” in line with the Consumer Price Index or some other inflationary measure, just to take the emotion and desire out of it. You may have exceptional years; for example, if you buy a house or get married your total spending may increase more than usual. But if you track your Personal Inflation Rate over time and keep it in line with inflation, any lifestyle creep becomes obvious to you and you can correct it. 

2.       Make sure you have some financial goals to focus on. For example, it’s a good idea in this country to save for your future self, in case you ever want to or need to stop working for money. You might also want to get out of debt, save for a house, or pay for your kid’s college. Whatever those goals are, bring them front and center so you know WHY you’re not spending every penny you earn.

3.       Before you decide that expensive things truly make you happy, do a gratitude check. Start by making a list of what you’re grateful for, like your warm home, plentiful food, and people you love. Do it every day, every week, or every month; whatever frequency works for you is fine. But use that process to really think about what you buy. You will start to question your purchases if you keep yourself focused on gratitude for what you already have. And try reading Happy Money: The Science of Smarter Spending, by Elizabeth Dunn and Michael Norton. It turns out that experiences make us happy, not things. The book also has some great tips for maximizing the happiness you get out of your money. And while you’re feeling all this gratitude, it may be a good time to set up a plan for your charitable spending!

4.       Break up with the Joneses. You have no idea what financial horrors their palatial mansion, designer handbags, and expensive cars are hiding. Heck, they may not be hiding anything, but the point is that your choice of friends has a big influence on you. If you choose to hang out with people who spend thoughtfully and live modestly, it’s much easier to do those things yourself. 

5.       Examine Consumerism. I touched on this when I mentioned gratitude, but it may help to get clear with yourself regarding what you think about Consumerism, or “Affluenza,” as it has been called. The original book (Affluenza, by Oliver James) may help. If you feel like Mr. James has a point, his book might also help you step off the hamster wheel of Consumerism and question your purchases.

One last thing: give yourself some grace here. We all fall off the spending plan wagon sometimes, so don’t despair and don’t judge. Just pick yourself up and get back on the plan…but notice what might have triggered this bobble and try to address it. Hang in there!

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Penny Farthing

I, Penny Farthing (non-wizarding name Kerry Read ), actually have a day job in the world of finance. This blog came into being because of my deep and abiding love for geeks and Personal Finance.