What is lifestyle creep?
Lifestyle creep happens when two things in your financial life increase: your income and your spending. Specifically, lifestyle creep happens when you spend your extra income on things that upgrade your lifestyle; as opposed to maintaining your current lifestyle after your income increases.
Lifestyle creep can be undetectable at first.
The term creep describes it well because extra spending can happen slowly and insidiously. It reminds me of the fable of the frog in boiling water. Yes, I know it's not true; that's why it's called a fable.
So the fable goes, if you boil a pot of water and try to toss in a frog, it will jump out. The drastic shift from room temperature to boiling is shockingly noticeable. But if you fill up a pot with room temperature water, place the frog in it, and slowly boil the water, according to the fable, the frog will boil to death (yikes) because the change in temperature is so gradual that it's imperceivable.
Even though this fable has been disproven (yikes), it still teaches us a great lesson that small, gradual changes can go undetected over time. And besides, all we have to do is look to humanity and Earth's slow and gradual increase in temperature to see a real-time, real-life example of this fable.
But back to the task at hand: educating you on the perils of lifestyle creep. So you might be reading and wondering, "Hey, Paco. It sounds like in order to experience lifestyle creep; you need to be the recipient of a little slice of privilege because to suffer lifestyle creep, your discretionary income has to actually increase." That's right, buddy. Thanks for acknowledging that.
Once that beautiful, sweet, sweet slice of increased income appears before you, it's very seductive and tempting to want to spend all that extra money. And at first, you may think you can afford the frivolity of unnecessary expenses. Why the fuck not? You were living just fine without that money anyway!
But when you finally notice lifestyle creep it can be hard to undo it
Over time, even though you know you've made more money if you haven't also saved and invested more, you'll start to notice that despite your income increasing, you haven't made as much progress on the savings and investments side of things. With more extreme cases of lifestyle creep, you might find yourself in more debt than ever -- which causes you to need more money. Oftentimes, those of us in this situation are caught in the cycle of more, trying to catch our breath on that lovely hedonic treadmill.
What isn't lifestyle creep?
Before anyone gets the pitchforks and torches because they are reading this and thinking about how much the cost of living has increased while their wages haven't, first and foremost, that is not lifestyle creep. Remember, at the beginning of this, I said two things must happen in order for it to be lifestyle creep. Your discretionary spending increases, but your too.
Being able to afford necessities you previously couldn't is not lifestyle creep.
When I was making very little money as a young business owner, I had to forgo necessities. As my income increased, my spending did too. But the first things I upgraded were necessities, not luxuries. For example, when I could finally upgrade my healthcare, I started to use it more on things like preventative healthcare and better quality care. These were all necessities that I couldn't previously afford.
When the cost of living increases, and your income increases do not match it, that's also not an example of lifestyle creep.
Inflation can also be looked at through the lens of the frog in boiling water. Oftentimes, we don't really even notice it. But occasionally, we experience an economic shock, or inflation increases so much that it hurts, like in the second half of the twentieth century and more recently in our post-COVID economy.
Annual raises are supposed to be a way to help workers combat rising prices. But in recent years, prices have soared while pay increases haven't kept up. This has put a strain on folks because they're buying the same groceries they were six months ago, paying 10% more, for example, while their income only increased by 5%. This is not an example of lifestyle creep.
A good reminder that some inflation is expected
It's also important to note that in our economy, over time, prices do gradually rise. In fact, according to economists, a slow, gradual, predictable increase in prices is a sign of a healthy economy. If you haven't experienced this slow rise in costs, it's probably because you're younger and haven't seen it with your own eyes yet. So ask your parents or grandparents or the oldest professor you know how much a jug of orange juice or a loaf of bread was when they started working, and you'll be able to see how prices rise overtime.
This is why investing is essential. You want to grow your money to keep up (or beat!) inflation. It's also a big reason you want to curb lifestyle creep as much as possible. You might not feel the consequences of increasing your non-essential spending at first, but you will eventually, and that's something I'd like to convince you to avoid. Let's look at a more tangible example.
Signs of lifestyle creep
Let's imagine that I'm a 28-year-old who has a full-time job at a production company. My take-home pay is $75,000. Thankfully, I don't live in a high-cost area, so my expenses, including my debt, are manageable. And I save 10% of my paycheck. This past year, I grew my YouTube channel and increased my annual take-home pay to $90,000. That's an extra $1,250 in take-home pay each month.
I'm excited about the increased income, but I don't have a plan for how I'll allocate this additional money. And I don't save any of it like I do with my wage income via my paycheck. So, without any real planning, I buy a new car. It's worth noting that I don't really care much for cars; I've never had a dream car or anything, yet somewhat impulsively, I decided that it would be nice to upgrade my automobile.
So, I go from driving a paid-off Honda Civic to buying a $46,000 Audi Q3. I put $5,000 down (a chunk of my savings) and borrow $41,000 at 7% for five years. My new monthly payment is $811.85. With my bump in income, I still have $438.15 each month. My car insurance goes up by $90 a month, and so does my spending on gas. Some months, I'm left with just over a couple hundred extra bucks, and I spend it going out with my friends for dinners.
Spending has gone up, but savings haven't
This is an example of lifestyle creep because the entire increase in income is spent on lifestyle upgrades. I'm not saving money or investing any more than before my pay bump. Sure, my new car expenses are just over 10% of my take-home pay, which is the range most experts recommend. But I could've explored a used option, which would be cheaper, and I mentioned that I don't value cars that much. These factors definitely highlight how my spending habits are entirely about upgrading my lifestyle.
What I could've done instead of lifestyle upgrades
Instead of buying a new car, I could have invested half of my monthly increase in pay and doubled the amount I was saving and investing. I'd go from $625 a month (10% of my $6,250 wage income) to $1,250 a month by adding an additional $625 (50% of my $1,250 in extra income). That ends up being an extra $7,500 in savings or investments for the year. And while it looks like all my extra income is going towards investing, remember that it includes the amount I already saved each month.
Investing an extra $7,500 isn't as sexy as a new car, but it's an example of how I could've used my extra money to fortify my financial health. There is still $625 of additional spending money left for the month that can be allocated towards my other money goals, like the dream of retirement. Or I could choose to spend it thoughtfully.
Strike a balance. Spend some money now and invest some for the future
It's reasonable to assume that I might spend more money because I've earned more money. Even in this example where I invest half of my additional money, there is still room to spend more each month. Some degree of lifestyle creep is expected. But there are plenty of reasons why one would want to avoid lifestyle creep.
Is lifestyle creep a bad thing?
It's natural to want to improve our living conditions, especially as we earn more. The story of humanity is one of progress, and lifestyle inflation reflects our collective desire to improve one's life. Paying for upgrades only becomes harmful when the balance between planning for the future and living in the now gets tipped toward the latter. When this happens, it's almost as if we're not taking advantage of the opportunity and privilege of an increase in income.
Runaway lifestyle creep fosters financial fragility.
The upsides to lifestyle creep might look like finally upgrading to that nicer apartment, treating yourself to everyday luxuries, and finally taking that dream vacation. But the downsides are harder to point to. One drastic downside is finding yourself in a state of financial fragility. This often looks like continuing to live paycheck to paycheck despite the increased income.
Financial fragility makes you vulnerable to financial shocks. Shocks happen all the time, without warning, and they come in all shapes and sizes. COVID was a financial shock, and the high rates of inflation to follow were also a shock. When a shock occurs to someone in a financially fragile state, their options are narrowed, and they're vulnerable to financial stress and uncertainty.
The trap of golden handcuffs
A high-paying job can come with more than some folks might have bargained for. It's almost as if, someone who is making a lot of money is also expected to spend more money on a luxurious lifestyle.
The trap is that an expensive lifestyle requires a high-paying job to maintain it. That's what golden handcuffs are. It's the part of keeping up with the Joneses that keeps you working to fuel the cycle of more.
How to avoid lifestyle creep
Knowing is half the battle.
Simply knowing what lifestyle creep is and how we can be susceptible to it is half the battle. Once you understand your own money psychology and the messaging we get from the world around us encouraging us to spend more, you can begin to find your agency.
Finding balance
An increase in income is a chance to fortify your finances and foster a state of becoming financially anti-fragile. Again, it's definitely not as sexy as a new car or a dream vacation, but it also doesn't have to be all or nothing. Finding the balance is the key to feeling secure about your future and abundant in the present.
When your income goes up, buy peace of mind.
Seek the balance between investing in your secure future and having an abundant present. Always remember that when your income goes up, buy a little bit of peace of mind by saving and investing.