Today, I’ll be going over what lifestyle creep is, why it occurs, what issues it can lead to if it’s not properly managed and how to properly manage it.
I would argue that one of, if not the biggest Financial issues that the majority of people will face in their lifetime is something that’s rarely ever even talked about at least in traditional financial media and no the issue is not debt, surprising! It’s not the stock market crashing, and it’s not even something like getting laid off from your job!
Those issues all can be very difficult to deal with, don’t get me wrong, but I would argue that there is another issue that may be even more damaging to our financial future. I’m talking about the phenomenon known as lifestyle creep.
What’s lifestyle creep?
Lifestyle creep is something that most of us experience throughout our lives to varying degrees and it’s often one of the main causes of some of those other financial issues that I mentioned a moment ago.
Lifestyle creep is defined in many ways but for the purposes of this post I’ll be defining it as “any situation where a person’s lifestyle cost or standard of living improves as their discretionary income rises”.
Why it occurs?
So, lifestyle creep often occurs for a couple of reasons the first is because of inflation.
Inflation, of course, is the phenomenon that explains why $1 today doesn’t buy you quite as much as $1 did 30 years ago, a $900 apartment today may be renting for $930 a year from now. As a result, the cost of raising your standard of living or even maintaining it does tend to creep upwards over time.
The second reason that lifestyle creep occurs, and the one that is less commonly talked about, is when we willingly choose to increase our standard of living by bringing more luxury into our lives and often will find that as this type of Lifestyle creep occurs former luxuries soon become considered necessities.
As a result, it can be difficult, though not impossible, to bring ourselves back to a standard of living that we previously had after we’ve been introduced to a new and higher standard of living.
Lifestyle creep can happen with just about anything. It can happen on small things like the clothes we wear the food we buy and our choice of drink at dinner and of course on much larger things as well like our furniture in our homes, cars, and other expensive luxuries and hobbies.
So, as you can imagine lifestyle creep is considered sinister for a few reasons because it’s very settle.
As I said, most of us has experienced lifestyle creep for many years but since it happens so slowly and over such a long period of time we don’t always notice just how much of an effect it’s having on our present Financial situations or on our financial Futures.
How does lifestyle creep work?
So, let me show you how this can work:
Let’s say that john is going to school full-time and as a part-time job, to try to pay for his educational and living expenses, he works 20 hours a week at $12 an hour.
Meaning on average he makes roughly $12.500 a year. As you can imagine he’s living on an extremely tight budget, he doesn’t own a car, he lives at home in order to save more money, and he still can’t afford to have too many luxuries on that level of income.
Maybe he goes out to eat with friends once a month as his reward for doing so well in school but again in order to save money he never goes to fancy restaurants and he always orders water for his drink since it’s usually free.
Then, John graduates and gets his first full-time job where he now makes $15 an hour, that’s approximately $31.200 a year which to him probably feels like a ton of money after living on $12.500 while he was in school.
Even after considering taxes he’d still be doing better than before, pulling in about $2.300 a month and for his hard work and success he rewards himself with a new, or at least new to him, car to get to and from his job and maybe he has some nights out with his friends for good measure.
The car cost him $10,000 but he doesn’t have $10,000 so he has to finance it. The 5-year loan at 4.5% interest rate cost him a little over $185 a month.
On its own that’s not back-breaking, he’s got the money now and after all the busing system where he lives is not good. So he needed some form of reliable transportation.
However, the car loan is not the only new cost that would have to be considered in his case. Since he didn’t actually have a car while in school he will now have to have totally new bills relating to the gas, insurance, and potentially maintenance for the car.
These costs will vary quite wildly depending on a number of factors but just for the sake of this example that between all of that he is spending an additional $250 a month on all these transportation costs.
But that’s not all, because living at home with his parents or roommates is kind of a drag and now that he has a job he has the ability to get his own place.
So, he looks around and rents an apartment which cost him roughly $800 a month once we add in all the utilities, insurance and other expenses associated with renting an apartment.
Now, looking at his lifestyle before, John was living on a shoestring budget of $12.500 a year or a little under $1,050 a month while he was in school.
He was living at home in order to save money just as many of us did or he was living with multiple roommates to save money in college and the luxury of his lifestyle was basically going out to dinner once a month.
Since getting out of school, he has added monthly expenses of $185 for his car, $250 for all these other Transportation expenses, and $800 a month for his apartment, for a total monthly budget of $2,200 on a $2,300 a month after-tax income.
In other words, John has officially entered the rat race and is living paycheck-to-paycheck and mind you his standards haven’t really gone up that much.
Seriously! they haven’t because he has a total of $15 a month roughly $0.50 a day to actually go out and enjoy life after covering his expenses. That isn’t really going to get you much nowadays.
Sure he’s living on his own and I don’t know maybe his parents were cramping his style or something so that’s certainly changed for the better, and he’s able to drive now, except not really because he can’t really afford the extra gas and the extra wear and tear on his car that would create without punching himself even deeper in debt and living on an even tighter budget down the road.
And maybe he’s able to go out to dinner twice a month now instead of once a month but that’s about it.
That’s an unfortunate reality that many people are facing today. They’ve worked hard, they put themselves through school and if they’re lucky they would have done it for free like John, in this case, managed to do but statistically speaking, that is also not usually the case.
They get their job (hopefully) and a couple of expenses sometimes, even the necessary ones, increase but they sometimes increase beyond what’s necessary like we saw in John’s case and suddenly they are living paycheck-to-paycheck.
So what’s the solution?
You might think that is future raises will enable him to escape the rat race and that very well might be true depending on what career he chose and how well he does at it and how much of those raises actually go towards his Investments.
But if he’s in a career that only gets him 3 to 4% raise per year it’s going to be quite a while before that happens.
Especially when we consider that inflation has been around 2 to 3% a year on average historically and eventually he’ll be hard-pressed to save enough money for his eventual retirement because that does get tougher to do as you get older assuming you haven’t been working towards it all along.
So the solution is to learn how to properly manage lifestyle creep because I don’t believe that lifestyle creep is inherently a bad thing. It’s, like most things in life, fine so long as it isn’t used in excess.
Cars are not bad, too much car is bad. Vacations aren’t bad, but too much too soon can be damaging to your financial present and future. There’s nothing wrong with lifestyle creep but too much can be dangerous.
It isn’t about how much you make or even how much you spend it’s the difference between the two that matters.
So how could John have better managed his own lifestyle creep?
Well, he has several options at his disposal. First, he could have spaced out his lifestyle creep expenses instead of trying to take them all on at once.
Even assuming that he wasn’t able to carpool with someone for work, or take advantage of some other form of ride-sharing, or public transportation, or heck even bike to and from work for a little bit in order to save up money for better transportation.
He could have at least stayed at home for a little while longer in order to pay off his car loan. Judging by the numbers from the previous example, he would have a $1050 a month in living expenses due to him living at home.
Plus $180 a month in car payments and the $250 a month for other associated transportation costs for a total monthly expense of $1,485.
This means that John would have had about $815 a month to put towards his car loan and he would have had it paid off in full in 11 months. he would have saved about $1,000 in interest over that time which is also a nice bonus.
Another thing he could have done was find some roommates that were willing to rent an apartment near his work which would lower the cost of John’s Transportation if not eliminating it altogether and help him save money on rent.
Hypothetical, let’s say that John found an apartment within biking distance of his work and got two roommates. The total cost of the apartment was $1,500 a month with utilities and the three split the cost evenly.
This means that John is paying $500 a month for housing and, beyond possibly the initial purchase of a bike; his transportation cost would be virtually nothing.
This would leave John with monthly expenses somewhere in the neighborhood of $1.550 a month. Meaning that he would have $750 a month left after taxes and expenses in order to invest for his future and have fun.
Now, if John wanted to retire at 65 and he was 23 after graduating college, he wanted to live on $24,000 here in today’s dollars when he retires, assuming a 3% rate of inflation that means that his retirement Nest Egg would have to be about $2,075,000 dollars once he’s 65 assuming we’re following 4% rule at an 8% average annualized rate of return over the Long Haul, John would need to invest about $550 a month in order to reach his goal.
Another thing that John could do is start a side hustle to bring in some extra money, you can read 10 Legit ways to earn money online to get some ideas and start making some extra money.
Now, let’s assume that John makes $1,000 a month from his side hustle and he still went and financed his car as well as moving out on his own, he would in this scenario, at least have some breathing room thanks to his $3,300 a month take home pay compared to his $2,285 a month budget.
This way, he would invest $550 a month to retire at age 65 and would have roughly $450 a month left over to let his lifestyle creep up without damaging his financial present or future.
Maybe at this point, he could start going out to dinner once a week with family and friends and get something other than water with his meal, maybe he could go to the movies, or on vacation, or he could decide to put a little extra towards his investments.
This will give him the possibility of becoming financially independent earlier in life than normal without sacrificing his current happiness.
Not to mention that over time those investments will gain interest which would give him some small form of security in case something unfortunate happens with his living situation, job, or side hustle.
Another thing that I feel John could and should do in any of these scenarios is to consciously pay attention to figuring out what he truly enjoys spending money on in life.
Because as time goes long he may find some things that he’s currently spending money on that just don’t bring him that much enjoyment and he can then start trying to figure out how to reduce or eliminate those expenses, essentially reversing lifestyle creep without lowering happiness.
Those are just a few examples of what John could do to better manage his lifestyle creep but that’s by no means an exhausted list.
So here’s where you come in, In the comment section below I want you to leave some examples of where you have experienced lifestyle creep and how you can or did manage it. I’m looking forward to seeing your examples and ideas.
Thanks for your time
This was my approach to Lifestyle Creep. I hope you liked it and if you did then I recommend you to join my newsletter I post about money management and how to make money online.
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