What is lifestyle creep? It’s the tendency for people to turn what used to be a luxury into a necessity as their income allows.
Johnny and Sue graduated college. They had a household income of $75,000 ($4,500 after tax monthly). Rent is $1250 per month for their apartment. They each had a $500 car payment. They save $600 toward retirement. They have various utility bills and grocery expenses and whatnot. They don’t have a lot left over for discretionary expenses, so they live frugally. They go to the movies sometimes. They go out to dinner twice a month. They have internet and one streaming service they pay for. All-in-all, they maintain a fair lifestyle with a very disciplined discretionary spending budget.
Fast forward 2 years. Sue has been promoted and Johnny has started his own side business as a consultant. Their household income is now $125,000. Their rent is the same. However, Johnny decided to get a new car with a new payment of $1,000 per month. They got 2 more streaming services so they can watch their favorite shows. They go out to dinner once a week. And Sue now has a standing monthly appointment with her beauty salon. Their clothing has upgraded from house brands to name brands, and this year they’re going on their first cruise. At the end of the year they have saved no more money than they did when they were making $50,000 less.
That’s lifestyle creep. As we work hard and become more successful, our eye toward discretionary spending changes. Frankly a certain amount of this is healthy and expected. Sue and Johnny are successful. They want to enjoy some of that success. It’s well-deserved.
What makes it dangerous, though, is it can take your eye off the prize. That prize is financial independence. Sue and Johnny make more money. That’s great! But now they HAVE to make more money to support their new lifestyle.
The lesson here is simple: it’s fine to let your lifestyle change as your income changes as long as you maintain discipline with your saving.
A great tip to help you identify unnecessary lifestyle creep is to periodically look at your bank account. Identify habits where spending may be damaging to your financial security and fix them. Do this once or twice a year. You’ll be amazed at the “fat” you can trim from your budget if you pay attention!
The example provided in this material is hypothetical and is intended for illustrative purposes only.