Lifestyle creep is real and has been the downfall of many high-income earners. (Just google people who won the lottery and wish they hadn’t.)
The term “lifestyle creep” (also known as “lifestyle inflation”) means spending more money as your income rises. If you succumb to lifestyle inflation, your net worth never really increases because you spend all the extra money you earn. It’s easy to fall into the trap of “I’m earning more money so I can afford to buy better things.” If you keep spending that extra income on things like a bigger apartment, more dinners out in pricey restaurants, expensive vacations, or designer clothing, then your financial growth will be stagnant. Don’t let yourself get caught up in the lure of spending more just because you may be earning more.
Lifestyle creep can start off subtly so that you don’t even notice it has taken hold of you. With each slight bump up in salary, you might start to lower your guard until you end up spending everything you earn or, even worse, becoming more comfortable with debt. What you enjoy today could just be stealing from your future self.
People work very hard to advance their careers, and earning more money, even in small increments, usually comes with that. As you gain more experience in your field and your income starts to increase, you should save a percentage of that extra income instead of spending it on momentary pleasures.
“How did you go bankrupt?”
“Two ways. Gradually, then suddenly.”
– Ernest Hemingway, The Sun Also Rises
Here are 8 practical ways to avoid lifestyle creep:
1. Dedicate a percentage of promotion bumps and bonuses towards savings before you spend your new income.
Don’t treat your new income like free money: it’s your future (and your future self will thank you). If you get a raise or a year-end bonus, you may be tempted to reward yourself for all your hard work. Before you pop the champagne, take a percentage of that new income and either put it into your savings or use it to pay down your debt. Don’t let your higher income become your new spending norm.
Some people make a firm rule (a deal with themselves) to put 50% of any bonus or raise (50% of the increase, not 50% of the total new income) automatically into savings instead of just spending that extra money. The percentage that you choose isn’t as important as the commitment to yourself to put a portion of all future raises and bonuses to work for you instead of having them disappear through extra spending. If you spend 100% of all increases, your future self will be no better off than you were before you got all those raises. Once you set aside a fair amount for your savings (or debt repayment), you can feel better about spending some of the extra earnings on things that you might not have indulged on before.
2. When you decide on a personal savings rate, use a percentage as opposed to a fixed amount. That way, when your income increases, your savings amount will increase too.
Let’s say you earn $40,000/year and you save $100/month. Your savings rate is 3%. If you get a $10,000 raise and you still save $100/month, your savings rate drops to 2.4%. You want to apply a savings percentage instead of just a fixed amount every month. In order to keep your savings rate at 3% with those numbers, you would have to increase your savings from $100/month to $125/month. Using a savings percentage instead of a fixed amount will guarantee that your savings will increase as your income increases. This, in turn, will help to keep you from sliding into lifestyle inflation. Putting your savings on auto-pilot and taking out more as your income goes up means you won’t be able to spend that extra amount.
3. Work hard to intentionally maintain your spending habits.
Living on a budget takes planning, focus, and intention. Over time, you develop certain spending habits that work for you. Just because you get a raise or a bonus doesn’t mean that you should change the way you spend your money. You can resist lifestyle creep more easily if you focus on the same spending habits you had before the raise or extra income came along. If you usually cooked at home every night except Saturday, don’t let some extra income slide you into regularly eating out more often.
Good habits—like resisting lifestyle creep—are essential to achieving financial success. There are people who, while fully able to afford luxury items, opt for the much less expensive option (a drugstore watch instead of a Rolex, for instance). Even billionaires resist lifestyle creep. Mike Bloomberg (when not taking the subway) reportedly drives a Chevrolet Suburban; Mark Zuckerberg, an Acura TSX; and Jeff Bezos, a Honda Accord.
Changing a habit is often a difficult thing to do. It takes dedication and practice. If you have frugal spending habits already, don’t abandon them just because you start to earn a little more money. Remind yourself of how your spending habits have served you before (assuming they have . . . and if they haven’t, even more reason to wring it in). Make a commitment to yourself to keep your spending habits in check even though you may have more disposable income in your paycheck, and your future self will thank you.
4. Strike a balance between a bump up in lifestyle and your future savings.
Everything in life is about balance. Too much of any one thing—work, sleep, food—is not good for you. If you get a raise or a bonus, try to find a way to balance a slight step up in lifestyle (if you want that) with saving for your future or debt repayment.
For example, if you are currently in a housing situation that really doesn’t work for you, there would be nothing wrong with applying some of your new income to improving your lifestyle and finding a better apartment or house. The problem that people get themselves into with lifestyle creep is that they just keep wanting more and more just because they can “afford” more (or even worse, they are trying to keep up with the Jones’ and justify spending more than they should . . . you know, they’ll “make up for it with the next raise” or “this is a long-term investment.”) If you can strike a balance between reasonable improvements in your lifestyle as well as saving your earnings, you will avoid the sinister side of lifestyle creep.
5. Before you make a purchase with your new earnings, compare the net change in your happiness from spending vs. saving.
Many people derive pleasure from spending money, but this drug rush is often short-lived. Some people get a pleasure boost from saving money, knowing that they are doing something good for their future self. Before you go out and get that nicer home or upgrade your phone, ask yourself if your happiness would be better served by making the purchase or by saving the money. Better yet, try to train yourself to appreciate the fact that saving money would be doing something good for yourself. That way, you’ll set yourself up for healthy spending decisions, even if you are fortunate enough to have a bank account that tells you that you’re able to “afford” something.
6. If you get a raise or a bonus, plan a reasonable splurge (if you need one) into your budget.
If you intentionally budget for a reasonable splurge using your raise or bonus, that may help you get past the feeling of “I deserve this.” There is nothing wrong with rewarding yourself or your family with some of the new funds. There are ways to reward yourself that are also an investment. Would joining a gym (or a nicer one) make you happier and get you to go (hopefully more often)? That’s an investment in your health. Will a home with more space or a nicer kitchen mean that you eat more at home (and hopefully healthier food) or are able to entertain outside of a public space? That will also save you money. Little splurges can help both present you and future you, as long as you keep the mindset that it’s a one-time commitment.
An added bonus (see what we did there) may be that you’ll get the urge to spend more money out of your system. Just make sure you don’t get into the habit (that’s the key word here) of spending more just because you are earning more.
7. Focus on the concept of “enough” and analyze how much money is enough for you to live on.
One way to stop overspending is to think about the meaning of “enough.” At its core, the concept of “enough” has to cover the basic necessities of living. Unless you’re Australopithecus africanus, you do need to shower, but is the overly perfumed designer brand worth the cost? Maybe you should “Dial” it back.
As you start to earn more, your understanding of having “enough” money may start to grow with your income, and sometimes that’s OK. The dark side of lifestyle inflation, however, starts to creep in when you think you can afford something (and maybe you can) . . . but then you get your first taste of luxury, and you start wanting more. What gave you that momentary pleasure yesterday may require more today, and that’s how the ugly financial monster on your shoulder takes over. You no longer know what “enough” is because now a steak dinner takes less of a bite out of your wallet than a fast-food burger used to. Steadily, you are on the fast path to lifestyle creep . . . that’s how it works. . . ”gradually, and then suddenly.” The paradox is that enough is never enough when you always crave more.
If you can analyze your spending in terms of having enough, you might be better able to resist lifestyle inflation. If earning X used to be enough to meet your needs and wants, then earning X+Y shouldn’t mean you suddenly need or want more.
8. Keep your eye on your financial goals.
Getting a raise or a bonus is rewarding, but you shouldn’t lose sight of your long-term financial goals. Remind yourself that if you spend your extra earnings every year, you can end up working hard year after year with nothing left to show for it (i.e., no increase in net worth). A monthly or quarterly check-in with one of the many savings apps that tracks your net worth—or even keeping track of your net worth with your own excel sheet (or use ours) or simple pen and paper—can help keep your long-term goals top-of-mind (and keep lifestyle creep from creeping into your life).
- Lifestyle creep is real: Don’t increase your spending just because you get a raise or a bonus.
- Set aside a percentage of your new earnings first before you spend any of it.
- Maintain your former spending habits even when you are earning more money.
- Look for balance between spending and saving.
- Consider the net change in your happiness from spending vs. saving.
- Plan in reasonable splurges if that helps you keep to your budget.
- Understand the concept of “enough.”
- Focus on your long-term financial goals and don’t spend everything you earn, including from a raise or a bonus.