The Battle Known As Lifestyle Creep

Elizabeth Clough, CFP®, AIF® |
Our company has the honor of working with people from all walks of life, and our clients range from those who are just starting their careers to those who have had great success and are now financially independent.  For many of us still working towards financial independence, being financially independent (also known as being retired) is a goal that sometimes feels elusive and frustratingly far into the future.  It can be hard to feel progress on a day-to-day basis.  With the help of a solid financial plan, I firmly believe financial independence is possible to achieve. 
But how?  
There are so many factors to becoming financially independent: regularly spending less than you make (and then saving and investing the difference!), having cash on hand to help smooth out life’s fits and starts, consistently making good financial decisions (for both small and big ticket items), investing cash smartly, being properly insured, and drafting legal documents.  And, after 20 years of financial planning for myself and for clients, I’ve decided that the number one factor in gaining financial independence is the battle against lifestyle creep. 
So, what is lifestyle creep? 
It’s allowing lifestyle expenses to creep higher over time as your wages increase.  For many people, this happens without thought – there’s extra money in the paycheck?  Great, it’ll get used.  Slowly that little boost every two weeks becomes unnoticeable, the little luxuries become the standard, and then it’s really hard to scale back down again. 
Sometimes there is societal lifestyle creep that happens whether we want it to or not – has anyone else looked at the yogurt choices recently?  The only choices are organic Greek yogurt.  If you’re hoping for the yogurt of old, you’re now out of luck.  Taste and consistency-wise, this is a win, but yogurt costs substantially more than it used to.  It’s much harder for a college student to make it a staple than it was 20 years ago.  There are many of these societal examples from cell phones – including the upgrade to smart phones! – to prepared food to streaming services. 
Usually, though, most of us don’t need any societal help with lifestyle creep.  While it’s natural to get a little more lax about comparison shopping as your income increases, the real problem is that raises and promotions often come with visions of upgraded clothing, cars, and housing – and of being able to spend what we want when we want to spend it.  I certainly admit to being guilty of this phenomenon myself; I’ve long had various art interests and projects, and as I’ve gotten older (and earned more money), I’ve been able to afford nicer supplies.
The biggest danger of lifestyle creep is that it happens gradually over an extended period of time.  It’s hard to notice as it is taking place, and as a result, most people delay actively saving for their futures.  As long as income continues to increase, the increased consumption doesn’t feel problematic, nor does the mindset that there will always be a chance to save later.  However, this creates a double edged sword:  not only does our money have less time to grow for us, but we also need more money to keep us in the style we’re accustomed to having. 
Another concern with lifestyle creep is that most people see big earnings-growth years during the early part of their careers.  At some point, we stall out of getting the big increases, and are left simply with cost of living adjustments.  These modest increases to income exacerbate the effects of waiting to save, as they are not enough to make up for years of consumption-driven decision making. 
The concept is easy to understand once it’s pointed out, but that still isn’t going to stop people from falling into the trap.  As always, there are ways to strategically approach and balance wants and needs.  There are several rules of thumb from the personal finance world to combat lifestyle creep.  One is to save 50% of every raise and bonus, while spending the other 50%.  Another version of this is to save 50% of every raise and bonus, put 25% to paying down debt, and use the last 25% for fun.  A third option is to save 75% of salary increases until you can save 20% of your take home pay on an annual basis.  As part of these techniques, it’s very helpful to time an increase to a workplace plan (particularly a 401k or 403b) when a raise happens.  All three of these are valid choices, but the most important aspect is to have a plan before the new income is normalized. 
In the past couple of months, two of my mid-career clients received promotions and raises – a true testament to them and their hard work over this pandemic.  We’ve talked about the increase in funds that will soon hit their checking accounts – and about making an active decision to decide how much should go towards savings vs. debt repayment vs. those little luxuries we all like to have. 
If you’re having similar growth in your income – or expect income growth or bonuses  in the future – give us a call.  We’re here to help you make a clear choice towards independence, both in life and financially. 
This information is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept. Certain information contained herein was derived from third party sources as indicated. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any information presented. We have not and will not independently verify this information. Where such sources include opinions and projections, such opinions and projections should be ascribed only to the applicable third party source and not to Rembert Pendleton Jackson.