If you’re like most people making a living for themselves, the more you earn, the more you’ll spend. This phenomenon is referred to as being a lifestyle creep, and it is possible the biggest reason that stops people from increasing their wealth. When you’re unable to create a buffer between your spending and your income, you’re going to get stuck in a paycheck-to-paycheck lifestyle.
This lifestyle is dependent on you making more money to maintain your current lifestyle. That said, this doesn’t only happen to people struggling to make a living. It can also happen to people who earn $250,000 a year.
What is Lifestyle Creep?
When your living expenses or non-essential expenditures grow with your earnings, you’ve possibly let lifestyle creep sneak into your life. This can make items or activities that seemed like luxuries before seem like an essential part of your lifestyle after you started making more money. We’re talking about those extended vacations to exotic places, new cars, state-of-the-art appliances, or frequent meals at a high-end restaurant.
Essentially, it’s your standard of living or lifestyle creeping up to a level you wouldn’t have been able to maintain in an earlier stage of your life. In a severe case of lifestyle creep, people can start cutting into their savings to maintain their earnings. This phenomenon, however, is more common among high earners, but any person can fall into this trap. Haven’t we all justified eating out more often after getting a 2 percent raise in our income?
Living within your means may seem simple when they’re small, but it gets harder as you start making more money. You may tell yourself that you’ll simply save more after your next bonus or raise, and everything else will stay the same. But this is also when the siren of lifestyle creep beings to wail.
“If I’m making enough to afford a bigger apartment, shouldn’t I just get one?”
While you may be able to afford the high rent, the increased expenses that come with a larger apartment will make you cut into your savings.
Why Do We Make These Mistakes?
The investing mistakes we make are often rooted in our natural decisions. The truth is, we don’t react the same way to the information we absorb. When enough investors have poor reactions, its affect becomes apparent on the entire market. Luxurious expenses and imports may increase because people don’t take their personal finance goals seriously.
This is where behavioural finance can help, too. It’s the study of psychology that can affect our financial decisions. It also helps us understand why investors make certain mistakes and how those fallacies can be avoided.
How Does One Avoid Lifestyle Creep?
The straightforward answer to this is predictable and boring: budget and keep track of your earnings and expenses. That said, it is also important to remember that you shouldn’t become a robot for tracking expenses. You’re a human with desires and emotions, and you’ll have to address the mental aspects of this phenomenon, too.
People often fall into the first trap: they start “rationalizing” their expenses. “I’ll take an Uber instead of taking the train because it’s faster,” or “I’ll get myself a personal trainer so that I feel motivated to exercise.”
The second trap is the thought that tells you that you “deserve” what you’re spending your money on. For instance, “I’ve had normal coffee at home for a long time now, I think I deserve a fancy cappuccino,” or “I worked incredibly hard this today, I deserve a massage.”
The third trap is fearing people think you’re cheap. For instance, you may feel obligated to pay for a friend’s meal who earns lesser money than you. To be clear, we’re not judging you if you’re getting a massage or getting an Uber. However, it would help if you were honest with yourself to avoid excessive spending behaviour.
How to launch an online course—and nail your email strategy
Why Does Lifestyle Creep Matter?
Think about it; there was once a time when you could live happily off $50,000. Now, you’re earning $65,000 a year. If you lived in the same capacity, you’d be able to save $15,000 a year! If you managed to save those $15,000 and were able to invest it in an asset that would give you a 7% annual return (which is modest), you’d have approximately $210,000 saved after ten years! That’s how compound interest can works in your favour.
You should limit lifestyle creep and what makes it dangerous because it creeps up on you slowly, and you won’t realize it. You’ll easily rationalize every small purchase you make, but once all these things add up, you’ll be accustomed to spending extra cash.
Bit by bit, your spending will increase as you start to make more money. You’re most likely to barely notice it happening, as it will be a small change every month. You’ll still be saving the same amount of money in the year, so you think you’re doing okay when you’re not. You could’ve amassed a fortune if you hadn’t increased your spending. Lifestyle creep is also an important factor to pay attention to because it can prevent financial freedom.
It stops you from living your best life and from retiring early so that you can pursue your dreams.
Staying on the Look Out
It’s not necessary to be frugal if you’re trying to succeed as an investor. Even though it may help, you must ensure that you stay in control of your spending and lifestyle as your income increases. Most people see small increments in their income throughout their lives. 2% here. 5% there. Attributing these earnings to an increasingly luxurious lifestyle can put all your hard work to waste.
Think about it. It’s a vicious cycle that most of us can fall into. We work hard to earn a better income, which will put us one step closer to financial freedom. However, then we devote that extra earning to an improved lifestyle and must work even harder for another increase.
A temporary increase in spending is okay. However, you must ensure that a phase does not turn into a lifestyle. An extravagant lifestyle can tarnish your personal finance goals.
