Lifestyle creep, or lifestyle inflation, is a change in spending habits associated with an increase in disposable income. The idea is that your lifestyle habits will adjust to match your compensation. This can be as subtle as daily coffees from a cafe instead of brewing at home, or as substantial as choosing to shop for designer clothes instead of browsing your typical stores.
The occasional nice dinner out or Friday latte is a benefit of extra cash, but habitual overspending is a sure sign of lifestyle creep.
Excessive spending on material items can compound and have long-term effects on your financial health. The more you spend on a new designer wardrobe, the less you have to invest in your savings goals, like retirement planning.
This can also impact your health and happiness. If you’re not contributing to an emergency savings, you may not be prepared to manage the financial strain of a car or home repair.
You don’t have to totally give up the finer things in life. You also don’t have to place every penny into savings. You can create positive spending habits and goals that offer tangible benefits for your lifestyle. Take a closer look at how lifestyle inflation can affect your finances.
How Lifestyle Creep Impacts Your Finances
Lifestyle creep encourages spenders to buy more and buy bigger, often unnecessarily. Studies from the Journal of Personality and Social Psychology have shown that spending money can actually make you happier — especially when spent on others. So it’s easy to overspend under stress, excitement and other moods.
However, these expenses add up quickly, and may contribute to financial stress rather than boosting happiness.
Imagine you live a comfortable lifestyle with a manageable amount of debt, contribute 15 percent of your income to savings and all of your bills are on autopay. Come quarterly reviews, you’re given a 5 percent pay raise for your hard work.
When the raise shows up in your bank account, excessive spending habits start to creep in. This may look like:
- Going out for drinks and dinner every Friday
- Renovating your wardrobe with designer accessories
- Financing the newest model car
- Buying a boat for summer outings
An occasional splurge is nice, but consider the lasting impacts of these lifestyle changes. Taking on new debt for a luxury car when your current ride only has 90,000 miles extends beyond the car cost. Oil changes and repairs are likely more expensive, and the car itself is a depreciating asset with little potential for financial returns.
Alternatives to spending habits that create lifestyle creep may be:
- Going out for a monthly brunch with friends
- Investing in a tailored suit for the office and interviews
- Paying off an existing auto loan
- Planning a lake weekend with your family
In most of these cases, there’s a positive benefit to the purchase without increasing your day-to-day cost of living.
Lifestyle Creep and Your Retirement
Retirement is the largest savings goal for many Americans, and the earlier you save, the better off you’ll be. Delaying or limiting investments in favor of material spending can significantly impact your retirement savings and comfort. Over 60 percent of retirees regret accumulating too much debt instead of investing sooner.
Contributing early gives your investment time to grow. Compound interest provides yearly returns that increase annually as your account grows. Young investors should know that 10 years can be the difference between $1.4 million and nearly $3 million of retirement money.
Those in pre-retirement have every reason to reconsider their current spending habits. Not only does excessive spending reduce the amount of money you contribute to retirement — it impacts retirement lifestyle expectations, too.
Retirees enter retirement with a median income of $53, 951 annually, which tends to decrease over time. That’s an immediate 12 percent decrease in income from the median American income of $61,417, which can be a difficult lifestyle change if you’re used to excessive spending.
This income decline may also make it harder to enjoy the finer things in retirement. Traveling the world or joining a golf club are expensive pleasures that can be hard to swing if you’re not saving thoughtfully.
Tips To Avoid Lifestyle Creep
You can have your raise and spend it, too. Here are some tips to invest in yourself and avoid the ramifications of lifestyle creep.
1. Create a Detailed Budget
An updated budget can show you how much disposable income you earn, where you’re spending it and opportunities for smarter spending. If you don’t already have a budget, now’s the time to start.
First, note your total monthly income. This is your regular salary, plus any money you earn through side hustles or passive income.
Then, gather your bills and add each category to your budget. If your bill isn’t the same amount every month, find the average you spent over the last several months. Add other fixed items like your monthly income, too.
Next, comb through your last few bank statements and customize your budget to see where you’ve spent your discretionary income. Group similar items together like clothing and accessories, dining out and entertainment.
Once you have all of your expenses in one document, review your budget to see where you can make smart spending choices. Continue to update your monthly spending to identify needs, wants and ongoing habits to find a budget breakdown that’s comfortable for you.
2. Set a Specific Savings Goal
With a detailed budget, you can set specific savings goals to contribute to each month. Long-term goals like retirement and homeownership are just as valuable as short-term goals, like a weekend getaway. A mix of goals allows you to balance fun with responsibility, and reap the rewards of smart savings periodically.
Investing money into savings goals also grows your investment with interest, so you ultimately have more to spend. Immediate material purchases don’t offer the same benefits, and the joy of a new jacket may not be as meaningful as a family vacation.
3. Practice Money Mindfulness
Mindfulness is the practice of identifying your thoughts, feelings and intentions in a given moment. Money mindfulness applies this practice to your spending so you can consider the implications of your financial decisions beyond the immediate gratification.
Consider waiting 24 hours to make any unbudgeted purchases or add items to a wishlist so you and others can buy them later. Reviewing your budget regularly to re-evaluate previous purchases can help inform future decisions, too.
Money mindfulness is a tool to encourage positive spending habits. Some days you may decide you really do want dessert with dinner, and others you may decide that money is better spent elsewhere.
4. Invest In Yourself
One of the best ways to spend your money is to invest in yourself and your well-being. Depending on your lifestyle and goals, this looks different for everyone.
If you’d like to accelerate your career, consider rerouting extra money toward continuing education, certification or industry associations.
Someone trying to better their health may join a specialty gym, pick up a new hobby or buy a new appliance to help them prepare meals at home.
Health and happiness are always positive goals, so consider where you can invest to better your life.
5. Declutter Your Home
A 2016 study found that cluttered homes increase stress levels at home. Excessive clutter may also signal a spending problem. Spend a few days organizing your space with “keep,” “donate,” “sell” and “toss” piles.
Clearing your home will feel great and identify spending habits. If you’re selling several pairs of sneakers you only wore once or twice, you can reconsider your collection and budget for future sneakers.
Regularly clearing your home and selling old items is a good way to make some extra cash and offset your expenses, too.
As your income grows, prepare the tools you need to avoid lifestyle creep and guarantee your retirement income.
All work and no play isn’t healthy for anyone, but smart spending can help you balance fun with positive investments for your future.
