Published in: Banks | Oct. 12, 2019

Lifestyle Creep: What It Is and How to Avoid It

By:  Lyle Daly

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Don't let treating yourself go too far.

Have you ever heard about someone with an absurdly high income who manages to spend every penny?

Most of us probably have, and most of us have probably also wondered how people can make so much and still be so bad with money.

Young woman about to step into private plane.

Image source: Getty Images

There's a common explanation for this, and it's known as lifestyle creep. Although it's most noticeable with high earners, this financial issue can cause anyone to save less and possibly even go into debt.

What is lifestyle creep?

Lifestyle creep may sound like a term for someone who steals your most glamorous Instagram photos, but it's actually a pattern where consumers spend more money on luxury expenses as their disposable income rises.

This frequently happens after getting a raise or paying off a monthly expense. You suddenly have extra money to spare, and there are few things easier to do than spending extra money. To reward yourself, you decide on a lifestyle upgrade, such as:

  • Getting a nicer car
  • Going out for dinners or drinks more often
  • Flying in first class instead of economy
  • Wearing more expensive clothes

Then you get used to these luxuries and make them a regular part of your life. Instead of saving that extra money, you've found new ways to spend it. And if you ever suffer a drop in your disposable income, you may find it hard to downgrade back to the standard of living you had before.

How to stop your expenses from creeping up

There's one thing you need to prevent lifestyle creep: a budget with a strict savings target that you increase with your disposable income.

When you have a budget, you can plan how you're going to spend your money each month, and then track your actual expenses to ensure you don't overspend in any area. Assuming you don't decide to ignore said budget halfway through the month, this will keep you in good shape financially.

A savings target is a key part of every budget, and experts usually suggest saving at least 20% of what you make. Here's a technique I recommend to avoid lifestyle creep -- every time your disposable income has a solid increase, aim to save at least 50% of it.

I'll break it down with an example to clarify what I mean:

  • You make $3,000 per month and save 20% ($600).
  • You get a $500 raise and commit to saving 50% of that ($250).
  • You're now saving $850 of the $3,500 you make per month, bringing your savings rate to just over 24%.

By doing this, you'll save more money every time you increase your income or cut your expenses, while still being able to enjoy a portion of that extra cash.

Some people recommend that whenever your disposable income goes up, you save the entire increase in your bank account. That's fine, too, but it can be frustrating to never take advantage of the extra money you're making. And as you're about to find out, lifestyle creep doesn't have to be something negative.

Lifestyle creep isn't always a problem

It's important to clarify that lifestyle creep isn't necessarily a bad thing. As your salary grows, you shouldn't feel guilty about using some of your disposable income to improve your quality of life. What's the point of making money if you're never comfortable enjoying it?

Now, it's probably confusing to hear that you should avoid lifestyle creep, except when you shouldn't. But there's a difference between responsible and irresponsible luxury spending. To ensure you're being smart about this type of spending, you should be able to answer “yes” to both of these questions:

  • Can you still reach your savings target? -- If you're able to save a set percentage of your income each month, don't worry about treating yourself. However, if your target isn't at least 20% of your income, then you should focus on saving, not spending, more of what you make.
  • Does the expense improve your life enough to justify its cost? -- This is 100% subjective, so you'll need to consider what you value in life and how you'll get the most enjoyment from your disposable income.

Everyone deserves to enjoy their life and be happy. It's just a matter of deciding what kind of purchases are going to help you with that.

Maybe you get a raise and decide that you're done living with roommates and you're going to pay more for your own apartment. Or you figure you'll use some of your additional income to travel in first class, because you really don't like economy.

If a luxury expense is something you're excited about and you can pay for it while still hitting your savings target, then it's absolutely worth the cost.

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