Are You in Danger of Lifestyle Creep?

If you’ve ever received a promotion or a raise, you’re familiar with that urge to immediately exercise your newfound financial power. It may just be a celebratory dinner after work — or it may be a riskier move to a pricey car loan. You have the money, so what’s the harm?

The problem with lifestyle creep is that over time you lose sight of what you actually need. With enough money coming in every month for every expense, it can be hard to imagine what would happen if your circumstances suddenly changed. With a reduced income or increased expenses, it’s very easy to go into credit card debt buying things you don’t actually need. While credit card debt is an issue for many people, the easiest way to prevent unnecessary credit card debt is having a clear understanding of what your true financial needs are.

Keep reading to learn more about lifestyle creep, or jump to our infographic below to find out if you're at risk.

What is Lifestyle Creep? 

So how do you know to recognize lifestyle creep? Lifestyle creep is when previously non-essential expenses now seem necessary. This usually occurs as your income slowly increases, and your discretionary budget grows larger and larger. After a raise, all that extra money every month will seem like less and less as you get into the habit of eating out more often, move to a larger place, or start going to a new hair salon.

At its heart lifestyle creep is an issue of momentum. Out of college, upgrading from a cheap studio in a dangerous area to a decent one-bed apartment is standard. Lifestyle changes like these have the power to improve your quality of life greatly, and it feels great to make them. The issue arises when we associate more upgrades with an increasing level of happiness. The reality is that after we have our safety and happiness seen to, spending more doesn’t mean being happier.

Here are some more examples of when spending has started to become a dangerous lifestyle creep:

• Getting a new car when the other one had no issues
• Saving the same amount of money each month that you did two years ago
• Eating out when you have the time to cook
• Renting a place larger than you need
• Buying lunch every day
• Paying for coffee every day

Dangers of Lifestyle Creep

Lifestyle creep to some degree is a natural progression of getting older. You aren’t expected to live like a broke college student your whole life, so what’s really the problem?

It is easy to slowly build a more expensive lifestyle. The problem arises when you have to deflate your lifestyle. Due to an unexpected layoff, sudden medical expenses, or changes in the economy, you could quickly find yourself with a pricey lifestyle and no way to pay for it. After years of treating yourself to dinners out and the occasional housekeeping as necessary, it can be difficult to cut back. Additionally, your monthly expenses may be larger than you can sustain without going into debt.

A clear consequence of lifestyle creep is that you aren’t saving as much as you could be. This means your emergency savings are likely under-funded, and your retirement may even be delayed by years. The more you’re used to spending, the more you’ll need in your savings and retirement, yet the nature of lifestyle creep means you’ll have less.

For the young professional, lifestyle creep can make it difficult to make a career change. Once you’re used to receiving a certain amount every month, it can be hard to make a career move that’s motivated by growth and happiness, rather than finances.

Who’s at Risk? 

The hazard of lifestyle creep is that it isn’t limited to those who aren’t good at budgeting. In fact, those who’ve had to cut back and budget are even more likely to feel warranted in buying frivolous things when they do have the money. Lifestyle creep happens to most of us, though the most at risk are:

• Young professionals who are growing in their careers
• Retirees suddenly needing to reduce their spending
• Entrepreneurs and freelancers who’ve recently had success

How to Combat Lifestyle Creep

Of course, you still want to continue to increase your income without worrying you’re putting yourself at risk. To avoid lifestyle creep there are a few smart financial habits you can adopt:

1. Set Long-term Financial Goals

One of the easiest ways for your extravagant lifestyle to creep up on you, is if you aren’t paying attention to the long-term effects of your spending. Setting a goal of how much you want to have saved in the next year, five years, and ten years can help you stay on track. Even if you aren’t sure exactly how much you want to save, you can still set a goal for when you want to retire.

By breaking up those milestones into monthly and even weekly amounts, you’ll have a much clearer picture of your overall financial situation.

2. Learn How to Treat Yourself

Like all things, combating lifestyle creep should be done in moderation. You can’t expect to eliminate all unnecessary spending. If you set your sights on cutting back too many of your luxuries, you’re setting yourself up for failure. Instead, understand when and how to splurge. For example, it may not make sense to buy coffee out every day just because it feels luxurious, but buying a pricier outfit that will last longer than cheaper clothing can actually be a good investment.

3. Automatically Transfer Your Raise

Received the good news recently? Take the possibility of overspending that raise out of your hands by setting up an automatic transfer. Each time you receive your paycheck, you can have the difference between your new salary and old salary automatically transfer in your savings. This ensures you aren’t spending the new income unnecessarily.

4.  Don’t Feel Pressured to “Keep Up”

A large indicator of a person’s spending habits is actually the people they surround themselves with. Money shouldn’t make or break friendships, but you should be mindful of your friend’s lifestyles don’t influence your purchasing decisions. Ask yourself if you really want a new car, or you simply want to show one off to your friend who was just bragging about theirs. Instead of going for expensive dinners to catch up, suggest a night in.

5. Understand What Really Makes You Happy

It’s undeniable that a nice meal out can lift your mood. But eating out regularly is unlikely to provide you with anything more than temporary satisfaction. True lasting happiness is more likely to come from the people you ate dinner with, and what you talked about. The same goes for an expensive habit that you currently have, or are dreaming to take on. Before spending, you should ask yourself if it will bring you lasting happiness or get you closer to your long-term goals.