Lifestyle Creep Defined, its Calculated Impact, & How to Beat it

What is Lifestyle Creep?

If you’re not familiar with “lifestyle creep”, here is my official definition:

Lifestyle Creep (ˈlīfˌstīl krēp), noun: the very real, very unnecessary, and very self-defeating personal finance phenomenon of increasing one’s lifestyle spending as a direct correlation to an increase in one’s income over time.

With lifestyle creep, your spend rises as, one-by-one, purchases once considered as luxuries to an individual have a way of slowly but surely being redefined as necessities. Buttered toast seems great until you meet avocado toast – and henceforth, buttered toast is for “suckas”. And one day soon we shall all pity the fools with smartphones that are deprived of facial recognition capabilities instead of fingerprint recognition.

Lifestyle creep is so prevalent in our society that it can almost be viewed as personal finance scientific law, where it is a given that the more money you will make, the more money you will spend.

lifestyle creep

This is evidenced in the fact that a large section of the financial planning and retirement industry (foolishly) still utilizes a multiplier of income as retirement guidance (i.e. “you should aim to save 12X your annual income in order to safely retire”). Why not just use, um… actual spending to calculate how much you will need to save up to spend in retirement? Because people spend most of what they earn and most people know what they make and spend all of it, so… shortcut!

It’s also evidenced in the fact that the average personal savings rate is a meager 2%. Many people basically spend what they earn throughout their entire lives.

Lifestyle Creep Does Not have to be a Given

Indeed, the gravitational pull of consumer lifestyle creep is pretty darn strong. And freeing yourself from the drive to consume requires constant effort and attentiveness, with occasional pitfalls along the way. The more you practice, the better you get, but even the best among us occasionally shank one into a water hazard.

But it’s not a given. It can be hacked and beat. And doing so may just be the secret to personal finance success.

The benefits of doing so can have a profound impact on the trajectory of the rest of your life.

Lifestyle Creep: The Calculated Impact

I haven’t seen anyone do this, so I wanted to actually put some realistic calculated math to show the impact of lifestyle creep (and beating lifestyle creep).

Let’s imagine 2 individuals, “Creeper” and “Non-Creeper”.

  1. Both start with the same $50,000 salary and through a series of raises and promotions, average a 7% income increase per year.
  2. Both start with a personal savings rate of just 2% per year ($49,000 spend).
  3. Creeper’s spend increases 7% per year (100% of her income gains are spent).
  4. Non-Creeper’s spend increases at the average rate of the Consumer Price Index (CPI) – at 2% per year. Non-Creeper saves the rest.
  5. For further impact, we’ll assume a modest 7% return on savings for both.

Here are the results.

YearIncomeExpensesSaved in YearCumulative Saved w/ 7% ReturnIncomeExpensesSaved in YearCumulative Saved w/ 7% Return
10-Year Total$690,822$677,006$13,816$19,672$690,822$536,536$154,286$199,058

You’ll notice that even with starting with a very minimal savings rate, Non-Creeper is able to save almost 10X Creeper’s savings over the 10 years, $199,058 versus just $19,672. Fending off lifestyle creep has a massive impact, even with a minimal personal savings rate to start.

Now what if Non-Creeper also was also able to save 50% of her income right from the start, with total annual expenses starting at $25,000 (similar to my household annual expenses), that go up 2% per year? Here’s the math on that.

YearIncomeExpensesSaved in YearCumulative Saved w/ 7% ReturnIncomeExpensesSaved in YearCumulative Saved w/ 7% Return
10-Year Total$690,822$677,006$13,816$19,672$690,822$273,743$417,079$583,312

Hot damn! Avoiding lifestyle creep in addition to a high personal savings rate results in Non-Creeper amassing over 30X the savings of Creeper ($583,312 vs. $19,672) over the 10 year period. Now imagine how this scenario plays out over the next 10, 20, or 30 years when the power of compound returns really kicks in.

Hopefully these numbers show the importance and impact of fending off lifestyle creep (and boosting your personal savings rate).

So the next question one should naturally have is: “how can I beat lifestyle creep?”.

Monitor Lifestyle Creep (Personal Inflation Rate)

Lifestyle creep can be measured with an actual calculated metric: personal inflation rate. And by tracking and monitoring your personal inflation rate down to the category, you can get a good sense of where your spend is creeping so you can stop it dead in its tracks.

Personal inflation rate = cost of all personal expenses in most recent year/cost of all personal expenses in year prior

Here’s an example in action:

  • Your 2017 expenses totaled $51,000
  • Your 2016 expenses totaled $50,000
  • Your personal inflation rate = $51,000/$50,000 = 1.02 (or, 2%)

Here is a a personal inflation rate calculator and spreadsheet that I put together to help with this.

If you can keep your personal inflation rate at or below the consumer price index average, or CPI (which has typically been around 2% per year the last decade or so), then you’re winning.

Trim and Trade Expenses

Monitoring your spending by category also gives you the intel you need to find opportunities to trim the fat. And this gives you an opportunity to figure out exactly what it is that you do care about.

Really want to improve your work wardrobe? Cut back on your telecom spending.

Want more fresh produce in your diet? Trim your alcohol tab.

Want to take a vacation this year? Start biking to work 2-3 times per week.

Bonus points if you decrease spend on monthly recurring expenses, as doing so is the equivalent of giving yourself a monthly raise of the same amount.

Practice Gratitude & Question Every Purchase

It is undeniable that even those among us with incomes that fall into lower and middle tiers have an extensive army of luxuries available to us that did not exist 1,000, 100, 50, or even 20 years ago. We have the medicine, communication, technology, clothing, transportation, health care, and entertainment that even the wealthiest royalty of just 100 years ago never could have dreamed of.

Yet, paradoxically, it seems that the more we have, the harder it becomes to please us. That is, unless we frequently practice gratitude and limit our indulgences.

The best way to practice gratitude is to discuss and document (journal or otherwise) what you are grateful for daily. And avoid the temptation to compare yourself to others (which may even mean avoiding those who don’t have a sense of gratitude and “enough”).

When you practice gratitude effectively, you begin to question every purchase – as you should.

Pay Yourself First

Your career would be abnormal if you didn’t get a few promotions and raises along the way. And many of those raises will outpace inflation.

When you do get them, the wisest thing you can possibly do is to save them from yourself. If you’re not underwater on cash flow, immediately put as close to 100% of your newfound earnings directly into increased debt payments, increased retirement savings (especially 401K matching), emergency savings, or untouchable funds for future goals via automatic direct deposits.

Remind Yourself of Your Goals

Clearly understand just why you’re doing this. If you don’t have short, medium, and long-term goals documented and in mind, it can be extremely easy to fall into the lifestyle creep trap.

Maybe it’s paying off your school or credit card debt, saving up for a down payment on a home, hitting certain retirement savings goals, or wanting to reach financial independence.

Know your goals, document them, and hold yourself accountable to them.

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