Lifestyle Creep: How To Avoid This Wealth Killer

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{Picture of a broken piggy bank

It was only 3 years ago I entered the professional workforce, I vividly remember when I received my first payslip, I couldn’t have been happier. After my first year, I received a 5% pay rise, I immediately thought to myself how rich I was compared to the previous year.

However, at the end of that month, I noticed something strange, I had less money in my bank account than I did in the previous month when I had a lower salary. I was dumbfounded, how could this have happened?‍. Even though my income had increased, I was somehow poorer.

I had become a victim of one of the great wealth killers, a phenomenon referred to as Lifestyle Creep.

What is Lifestyle Creep?

Lifestyle Creep is a process which occurs when an individual’s standard of living rises as a result of increased discretionary income (the money left after deducting your savings, investments and mandatory expenses). This rise in standard of living can be mostly attributed to former luxuries being turned into necessities. In other words, when your ‘Wants’ become your ‘Needs’.

That Netflix subscription suddenly becomes a must have; instead of packing lunch to work, you feel you’ve earned the right to always eat out; your car suddenly isn’t good enough for you, you must own the latest one. The common pattern is the change of mindset towards non-essential items, you feel it is your right to have them, that you deserve them, rather than these items being a choice.

Why is Lifestyle Creep a Wealth Killer?

One of the most dangerous aspects of Lifestyle Creep is the fact that it unknowingly creeps up on you, slowly withering away your wealth. It helps promote a habit of consumerism, you begin to buy things you don’t really want and definitely don’t need, just because you ‘can’.


Let’s actually do some quick maths to see the effect of Lifestyle Creep:

Meet Afam and Bola.

Picture showing a man and a woman.

  • Afam, a 23 year old UX designer starts off with a salary of $60,000 a year, he has a savings rate of 20%, meaning he saved $12,000 in his first year. Over 10 years, Afam has a yearly income increase of 7% but also has a yearly expense increase of 5%.
  • Bola, a 22 year old Social Media manager starts off with a salary of $35,000 a year, she has a savings rate of 30%, meaning she saved $10,500 in her first year. Over 10 years, Bola also has a yearly income increase of 7% but unlike Afam, she has a yearly expense increase of only 2%.
  •  Assumptions:
    •  Annual Inflation rate: 2%
    • Annual Savings Interest rate: 3% 

Let’s investigate how the finances of Afam and Bola pans out over 10 years:

Over 10 years, we can see the impact of Lifestyle Creep on Afam. Even though he earned $345,000 more than Bola over that time-span, he has $58,000 less than her in total savings.

How to avoid Lifestyle Creep

Lifestyle Creep while being a dangerous phenomenon, is one that you can easily prevent from destroying your wealth. There are 6 simple steps you can implement to help combat it:
 

  • Monitor your Lifestyle Inflation Rate

As the old adage goes, “What gets measured gets managed”, a simple way of combating Lifestyle Creep is to calculate your Lifestyle Inflation rate on a regular basis. Your Lifestyle Inflation rate refers to the percentage increase in your expenses.

To calculate your Lifestyle Inflation rate, simply divide your total expenses this month (or year) by your total expenses in the previous month (or year). For examples lets say your total expenses in July 2018 was $1,605 and in June it was $1,500 , then your Lifestyle Inflation rate is 1.07 which is 7% ($1,605 / $1,500).

If this rate is equal to or more than the rate of growth of your income then you’re experiencing Lifestyle Creep. So, if you got a pay rise in July 2018 that is also 7%, then you’ve become a victim of Lifestyle Creep.

You should always seek to keep your Lifestyle Inflation rate below both the rate of your income increase and the economic inflation rate.

 

  • Spend Intentionally

We live in an economy fuelled by mass consumerism, and while this has been a benefit to the world’s economy, it has also caused us to start to accumulate items we don’t need nor actually really want. Stay woke – the advertising industry knows exactly how to make us think we want an item.

The way to battle this is to spend intentionally. An easy way to practice this is to create a ‘30-Day Wants’ List. Using a note taking app on your phone, every time you see an item you want to buy, list the name of the item, price of the item and the date. After 30 days, if you still want the item then buy it. You’ll find that you won’t actually buy most items.
 

  • Create a Fun Fund

While I’m a believer in being frugal with your money, I don’t think the journey to become financially free should be miserable. What good is having money if you can’t use it to do things you enjoy?.

However, just because you should have fun doesn’t mean you should overdo it. If you find yourself dipping into your savings because of ‘fun’ then you’re doing it wrong. Repeat after me:

 

My Emergency Fund is not for Emergency Fun! – Click To Tweet

 

Rather than depleting or not building your savings, you should aim to create a separate fund that you contribute to for the sole purpose of fun activities.

Warning: Your monthly ‘Fun Fund’ contribution should be significantly lower than your monthly Savings & Investments contributions.

 

  • Increase your Savings/Investments Contribution Proportionally

If you’ve just received a pay rise of 5%, then your contribution to your savings and investments accounts should also rise by a minimum of 5%. Use your pay rise or bonus as an opportunity to increase your savings rate!

This way you automatically will have less discretionary income and the temptation to spend the extra money is immediately reduced.

 

  • Pay Yourself First

Paying yourself first means you’re taking care of your future self before your present self.

Practically speaking it means the moment you get your salary, the first payment you make is to your savings/investments accounts. Doing this ensures that you don’t get to the end of the month and start to wonder why you didn’t save the amount you planned to earlier.

To make this process easier, set up a standing order between your current account and your savings/investments accounts.

 

  • Remind Yourself of Your Goals

Without having short-, medium- and long-term goals, having the motivation to combat lifestyle creep can be hard. If you haven’t set any financial goals for yourself, please stop what you’re doing and figure these out now. For help with how to develop them, check out our article on developing SMART financial goals.

The is important because of how the human brain works, without any incentive we often don’t take action. You go to work to get money, you go to gym before your holiday to have a ‘summer body’. Developing your goals will give you the incentive to combat Lifestyle Creep.

 

Although Lifestyle Creep is a killer of wealth, it is one we can prevent. Granted, there may be moments in your life where your Lifestyle Inflation rate will increase e.g. you’re about to get married and want to move in together, etc.
These moments can and often will happen but the point is that you’re aware it’s happening and you stop yourself from justifying turning luxuries into necessities.

 

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