The Lifestyle Creep Snowball and How to Avoid It

Feel like your financial situation hasn’t really improved over the years? Do you still find it hard to leave money behind to save every month?

Many people find that their career has progressed and they are now earning more than they ever have, but they still don’t feel better off. Why is that? The simple answer is Lifestyle Creep. Or Lifestyle Inflation as it is also known.

What is Lifestyle Creep?

Lifestyle creep is essentially the situation where as your earnings increase over time, so do your expenses at or around the same level (or if you’re really bad, sometimes the expenses increase at a higher rate – hello debt!). There are countless reasons for why this can happen, many of which you will see in this article.

But first, what does this look like in practice?

Lifestyle Creep in Practice

Take this example. We have a person called John. John is 18 and has just finished High School and is working Part-Time at <insert your favourite retail outlet here> and earns around $300 per week. New to the workforce and excited to be earning his own money, John spends around $100 per week on food, $100 on travel expenses and $100 on luxuries, like clothing, nights out or movie tickets and so on. This is a pretty normal situation for teenagers.

Now let’s fast forward a few years. John is still working Part-Time but has moved up the ranks and is doing some more hours alongside his tertiary study and now earns $650 per week. This has been a gradual rise over the last 3 years, as John is now 21. Looking at his expenses, a typical week for John is to spend $200 per week on food, $150 on travel, and $300 on luxuries. Whilst it sounds like a big leap, for John he has only loosened his belt to celebrate any wage increases he has had over the years, and since the money was there he could afford it (or so he thought…).

Whilst the above is a very simplified example of a real person’s life, this is generally what happens. You don’t remember the things you went without in the early days because they weren’t accessible to you. Once they became accessible, it felt like denying yourself to not take advantage. The real issue here is that as John’s earnings went up, his ability to save didn’t. You don’t need to live like a hermit your entire life. But as your income increases, so should your ability to save. It needs to be balanced correctly.

My personal experience with this is a little different, as I have always been very frugal. The only exception however is with cars. I have always loved cars since I was a child so they are my passion and are the only area of life I allow myself to splash a little bit of extra money on here and there. In my late teens however, I caught myself getting out of hand with this. I bought my first car at 16 (with my own money!) and over the next few years did what any car guy does. Wheels, exhaust, suspension and what not.

It was pretty cheap and cheerful until I started earning more money and upgrading into more serious cars. $3000 cars turned into $14000 cars and $300 sets of wheels turned into $3000 sets of wheels. It may sound small to some, but that was only the difference from my mid-to-late teens! Imagine if I didn’t stop it before I got into my post-grad salary

As you can imagine, I have cut that level of fun right back, because I realised it was the experiences that were fun, not the flashier bits I was buying, so I focused on being more efficient where I targeted my fun and left my bank account alone!

How can I Avoid Lifestyle Creep?

1. Budget

If you don’t keep track of what you are spending and where, how can you identify when things are trending upwards unnecessarily in your spending habits? If you think budgeting is hard, I urge you to read this article and reconsider as it is the most important point in this list – 5 Budgeting Mistakes that Make It Seem Hard to Get Ahead.

2. Monetise

Find a way to monetise your hobby. This tip won’t work for everyone, but it did for me (to some degree) so I wanted to share it. On the car background I mentioned above, even though I was splashing some cash on something selfish, I found some ways to make my knowledge and passion in the area work for me (sometimes).

For example, I spotted the odd deal that no one else could see and made money buying/selling/parting-out cars. I also dabbled in some automotive YouTube videos which, albeit didn’t earn much but they made a little bit. I want to plant this seed because for some hobbies, this can work really well and allow you to do more of what you love without it constantly eating into your new wages.

3. Pretend you didn’t get a raise

If you were living comfortably on your previous wage and honestly weren’t dying for a little extra, consider saving all or most of the difference your new wage might have if you’ve received a raise. If you jumped from 3k per month to 3.2k per month, pretend you’re still on 3k per month and top up your investments/savings with the extra $200 per month. This can be huge way to catapult your savings and increase your net worth.

4. Recognise Needs vs Wants

People often get a little bit entitled as they earn more. Yes, you work hard. No one doubts that, but there are people who work far harder than you or I that earn less. It’s just the way of the world. So before you say you need this new Phone or Car or Shoes. Just consider, would you still care so much if you didn’t just get given a bit of extra cash? Chances are your mind is looking for some short-term gratification in the form of retail therapy.

5. Pick up a side-gig

If you want to up-scale your lifestyle, it may be a good idea to pick up a second job or start your own side-hustle to bring in some extra money. That way, your income isn’t so closely tied to the hours you work at your regular job. This gives you the ability to spend a little more, while still earning more to save. As you earn more money, you should find you can save more money. If not, stop looking to spend and look to earn or cut back until you’ve got the right balance again.

Do you feel confident that lifestyle creep won’t happen to you?

Alex O'Donnell

I'm a 20-something IT professional by day with a strong passion for finance, investing, cars, motorbikes and music. Living in Sydney, Australia.

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    Ashleigh

    👍🏼

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