The Insidious Impact of Lifestyle Creep

What is “Lifestyle Creep?” “Lifestyle creep occurs when an individual’s standard of living improves as their discretionary income rises and former luxuries become new necessities. The rise in discretionary income can happen either through an increase in income or decrease in costs.” Lifestyle creep can occur when your young when income tends to continue to rise. It can occur when closer to retirement when costs go down after kids leave the home to go out into the world on their own.

In other words, lifestyle creep can happen at any age. This article explains how it can happen at any age. It is insidious. What does insidious mean? The definition includes terms like “beguile,” “stealthy,” “seemingly harmless,” and “with grave effect.” In other words, something that probably is not in your best interests in the long run. And that is precisely the problem, losing sight of important financial goals by spending money in ways that become hard to sustain.

You see, lifestyle (standard of living) and saving required to sustain that lifestyle in retirement are two sides of a ladder. The higher standard of living goes, the more savings needed to sustain it. Lifestyle creep then is akin to climbing the ladder (increasing lifestyle) and forgetting about the other side of the ladder required to keep everything stable.

A higher standard of living requires even more money saved to sustain that higher standard of living into and through retirement. But, if you’re busy spending money for a standard of living you believe you deserve, how can you sustain it? You’ll have to work longer than you’d like; and often people feel they love what they’re doing and will work forever. There’s a complex, often little understood by people, interaction between beliefs and feelings.

What if you can’t work “forever” due to some unexpected development either with your health or with your job (the profession, company, or business suddenly gets disrupted and your job in income changes). What’s Plan B? Do you now see the connection to “insidious” above?

So how do you avoid lifestyle creep? This article describes 6 simple steps:

• Reward yourself – WISELY
• Create a Fun Fund
• Pay yourself FIRST (both for spending shocks from unexpected expenses and all your other goals)
• Write down your goals
• Make gradual changes
• Surround yourself with friends who also get it (understand)

Here’s another article describing 12 things to consider to dampen the insidious effects:

• Clearly define your goals and definition of success in life
• Set short-term and mid-term goals that align with those above
• Automatically transfer your raise before you can spend it (at least a part of it – you can reward yourself with a little too, unless you’re already behind on other goals)
• Avoid debt (I’d add that there’s Bad Debt, Necessary Debt and Good Debt … avoid the bad debt)
• Make paying off debt a priority (especially the bad debt described above)
• Don’t repeat splurges with any frequency
• Create and stick with a splurge budget (the Fun Fund from above 6 steps; and consider the spending shock point above too)
• Kill the “I deserve this” point of view
• Carefully research (I’d restate this – think about) all significant purchases
• Bump up your retirement contributions (especially if you’re already behind and not participating to the maximum extent possible already, i.e., contributing the maximum amount allowed (which for many is still not enough to retire on depending on your standard of living already)
• Don’t inflate your friendships (interesting that this point is also mentioned in the 6 points above too)
• Find the free and low cost things to do that you really enjoy (and do those with those friends who also really enjoy doing those things too)

You can transform your thinking and habits from spending to saving once you understand the difference and what the objective of saving and investing are as they relate to the bigger picture of earning and spending.

Knowing how to make change involves tweaking your habits over time with the goal towards your desired new reality, versus old habits.

Lifestyle Creep is very hard to undo once it sets in, especially for those who are older and don’t have time for future earnings improvements to offset past and present lifestyle inflation (another term for the phenomenon) effects. Just because you’re young doesn’t mean you can get away with letting expenses creep up. Things change – and change always comes unexpectedly and suddenly. It’s best to plan for change too.

Moral of the story: Keeping lifestyle and retirement savings balanced (through a Retirement Feasibility Timeline) is such a simple concept, many people miss it! If you save a bit more, then you’ve reduced your standard of living (lifestyle) by that amount. You get used to that lifestyle. Then when a promotion or pay raise comes along, you save some of it and spend the rest. How much to save? As much as you can to keep lifestyle creep in balance with ultimate retirement sustainability.

Doing a retirement plan periodically, where you calculate how you need to save each month in order to retire when you desire, gives you the insight you need to balance today’s lifestyle* with the resources to sustain that lifestyle through retirement. Don’t forget to include income from Social Security and/or a pension if you have one too. If you don’t run the numbers, you’re just guessing and hoping.

*Lifestyle = standard of living; which you can get a very good estimate of without laborious budgeting exercises, simply by looking at your tax return’s adjusted gross income. Your tax return shows all the money that has come in, and what you did with it (saved some for retirement, paid taxes, and spent the rest). How you spent it is up to you and everyone is different; that’s your lifestyle. Lifestyle creep, again, is where you’re spending more now than can be sustained later.

Bonus material for a deeper dive for those interested.

Photo by Kaique Rocha on Stocksnap