by We all want to build long-term wealth. But what do you do when you receive a raise or bonus at work? What do you do when you receive a large gift or inheritance? Is your first instinct to spend it or save it? This post covers how to avoid lifestyle creep so you can continue to reach your financial goals.
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What is Lifestyle Creep
Lifestyle Creep is when you adjust your lifestyle as your income increases. They call it lifestyle creep because a little additional spending here and there can affect your finances and creep up on you without you realizing it.
For example, let’s say you make $50,000. You spend $40,000 on essentials like food, housing, and transportation, and you’re able to save $10,000 a year. I’m using saving synonymously with investing.
Now, you’ve got a huge promotion at work that now provides you $100,000 a year. Congratulations! Let’s say you increased your spending to $90,000, while you continue to save $10,000. Maybe you moved into a bigger house, upgraded your car, bought all the latest Apple products, and eat lobster 3 times a week. You are a full-fledged victim of lifestyle creep.
Conversely, let’s say you continue to spend $40,000 on essentials, and now you’ve increased your savings to $60,000. You continue to live your old lifestyle before your promotion. That includes driving your old car, staying in your old apartment, and eating (delicious) chicken every day. You are a conqueror of lifestyle creep because you didn’t succumb to it.
Lifestyle Creep Expenses
- Here are just a few expenses that can creep up on you without you knowing it.
- Spending more on clothing
- Spending more on eating out
- Spending more on housing
- Buying a new car
- Travelling more
- Buying the latest electronics
Psychology of Lifestyle Creep
We all want better things. A bigger house. A new TV. A faster car. A vacation in the Hamptons.
We worked hard for it. Don’t we deserve these things?
If you receive an additional $50,000 a year, why not spend it?
It all goes back to the Time Value of Money.
Let’s say you expect the raise to affect your income for the next ten years. Here are two scenarios of someone making $100,000 a year.
Victim of Lifestyle Creep:
Spends $90,000, invests $10,000 each year for 10 years.
At 10% growth rate compounded annually, at the end of 10 years she has $191,449.
Conqueror of Lifestyle Creep:
Spends $40,000, invests $60,000 for 10 years.
At 10% growth rate compounded annually, at the end of 10 years he has $1,148,698!
At the end of ten years, the conqueror would accumulate nearly 6 times as much money, equating to over a million dollars! Spend more now?… Or spend less and watch your money grow?
Keeping Up with the Joneses
Why do you think people post pictures of big milestones, accomplishments, vacations, and other happy events on social media?
We all want to show the world how happy we are, how successful we are, and how powerful we are.
We’re only human.
That’s the same idea behind “keeping up with the Joneses”.
Used in many examples, there exists a theoretical couple who lives next door named the Joneses. When the Joneses bring home a brand new convertible and brag about it, what is your instinct? You might look at your ratty 20-year old honda and think, dang maybe I should get a new car. Guess what? Buying a new car means falling into the lifestyle creep trap.
When the Joneses brag about their month long vacation in an Italian villa, how does that make you feel? Do you start looking up vacation packages on Expedia? Guess what? Booking that vacation is another lifestyle creep trap.
Cars, vacations, and other luxury items are fine in moderation and if you can afford it. But if you’re spending your entire bonus on it, you negatively impact your ability to reach your financial goals.
Screw the Joneses. When they’re scraping by in retirement, you’ll have the financial freedom to do whatever you want with your time.
Lifestyle Creep when it’s Necessary
Lifestyle creep isn’t always a bad thing or avoidable.
For example, as I started getting raises at work in my early 20s, eventually I decided that it was time to move out of my parents house. I went from paying $0 a month in housing, to about a few thousand a month.
Was I going to stay with my parents forever for the sake of avoiding lifestyle creep? Of course not!
So naturally there are times when succumbing to lifestyle creep is necessary.
But upgrading your 2019 Tesla to a 2020 Tesla? Doubling your clothing budget? Buying Armani suits? Are these necessary to your lifestyle? Do they spark joy? That’s up to you.
Enjoying in Moderation
There is a wide spectrum between being a Victim or a Conqueror of lifestyle creep.
With your newfound money, you can spend 100% of it or spend 0% of it. While saving the remaining balance.
The question is: What is the ideal sweet spot on this spectrum?
Ideally, with your newfound riches, I would recommend saving more than you’re spending.
For example, with the additional $50,000 in income, you could spend 30% of it, and save 70% of it.
If you’re a big spender and want to enjoy the fruits of your labor today, you might be closer to the Victim end of the spectrum. You’ll save a little more, and spend a lot more.
If you like to think long term and delay gratification like myself, you might be closer to the Conqueror end of the spectrum. You’ll spend a little more, and save a lot more. If the stock market continues to do its thang, you’ll be sitting on a healthy nest egg later.
It’s Your Life – Spending is OK
You might see a lot of media articles of people who saved 80% of their salary and lived like misers to retire at age 35. Is that your goal? That certainly is NOT my goal.
Don’t be afraid to live and spend money. Treat yourself sometimes and remember to enjoy life. There is no reason for you to be an absolute Conqueror of lifestyle creep. You can simultaneously spend a little more, and save a LOT more.
Furthermore, your life scenario could be different from most. If you’re sitting on a nest egg of a tens of million dollars already, and you’re nearing retirement age, maybe succumbing to a little life style creep isn’t such a bad idea.
The key for most people is to spend wisely and invest wisely…. In other words, spend moderately and invest lavishly. This will be your ticket to financial freedom.
Putting it All Together – How to Avoid Lifestyle Creep
When you come across more money from a promotion or inheritance, it’s tempting to spend it all. Maybe you want to move into a fancier neighborhood, buy a new car, and take trips to the Balkans. Spending in moderation is fine, even encouraged, but when you spend your entire bonus, you’ve succumbed to lifestyle creep. Avoid lifestyle creep by analyzing what you want to do with your bonus, and try to save more of it than you spend. By finding the sweet spot, you can both upgrade your lifestyle AND save to invest more.
Let me know your thoughts below!
What did you do with you last promotion/bonus? Were you able to avoid lifestyle creep?
