Key Takeaways
- Lifestyle creep is when you slowly spend more money as your income goes up, usually without realising it.
- It often shows up in the form of buying more expensive things, upgrading homes, going out to eat more often, or getting more than one subscription.
- To keep lifestyle creep from happening, start by making a budget and sticking to it. You can set aside a certain amount of money each month for savings and set it up to automatically go into your account so you don't spend it on things you don't need.
- Setting clear financial goals and checking your spending often are both very important. Don't make any changes to your lifestyle that could end up costing you more than you make.
- Don't get into bad debt, like credit card debt or personal loans with high interest rates. Use your money to make smart investments instead.
- It's also important to learn delayed gratification and avoid comparing yourself to other people. Changing how you think can help you keep your finances in good shape.
- If you're already experiencing lifestyle creep, it's important to rethink your priorities and downsize where you can. If you need to, pay off your debts by consolidating them and building up your savings again.
Lifestyle creep, also known as lifestyle inflation, is a subtle but significant challenge that can hinder you financially. It’s important to understand this phenomenon, recognise its effects, and learn strategies to avoid and recover from it.
Lifestyle Creep Meaning: What Is It?
When your income goes up, so does your discretionary spending. This is called “lifestyle creep.” This happens a lot without people recognising it. For instance, someone might buy a new car, eat at fancy restaurants, or go on expensive vacations after they get a raise. These changes might not seem like a big deal at first, but they can add up and hurt your savings and stop you from reaching your financial goals.
Lifestyle Creep in Australia: A Cause for Concern?
Lifestyle creep can happen to Australians at any point in their working lives. It can start with your first full-time job when you first experience earning decently. You may start purchasing things you couldn’t have afforded before while working part-time or studying.
Lifestyle inflation also creeps in as you progress through your career. this year, employers are feeling more confident about business activity. Around 86% of employers intend to increase employee salaries as a result. With the upcoming increases, people may be susceptible to upgrading their lifestyles and spending more than they earn.
Finally, lifestyle creep can happen in the years leading up to retirement. By this time, your mortgage and other payments are fully paid off. Your children will be working age, and you’ll have plenty of funds to spend on yourself. You may be tempted to suddenly increase spending. However, it’s important to save at this crucial time as research shows only 30% of Australians can retire comfortably with savings.
No matter what stage you are now in your life, it pays to be wary of lifestyle creep and the ways it can affect you in the long term. It’s crucial to take strategic steps to avoid this and set yourself up for financial stability.
Examples of Lifestyle Creep
To better understand lifestyle creep, let’s look at some common examples:
- Moving to a more expensive neighbourhood or purchasing a larger home after a salary increase.
- Upgrading to an expensive, high-maintenance car after a bonus
- Regularly buying designer clothing or gadgets instead of opting for more affordable alternatives.
- Habitually eating takeout instead of doing groceries and cooking
- Increasing the frequency of international trips or dining at high-end restaurants.
- Adding multiple streaming services, gym memberships, or other recurring expenses
The Effects of Lifestyle Creep on Your Finances
Lifestyle creep can have lasting effects on your financial health:
- Reduced Savings: Higher discretionary spending leaves less room for savings or investments.
- Debt Accumulation: Overspending can lead to reliance on credit cards or loans to cover expenses.
- Delayed Financial Goals: Goals like buying a home, starting a business, or retiring comfortably become harder to achieve.
- Increased Financial Stress: Living paycheck-to-paycheck despite earning a higher income can lead to anxiety and stress.
How to Avoid Lifestyle Creep
Create a Budget
A well-structured budget helps ensure that you allocate funds to necessities, savings, and discretionary spending. Start by calculating your after-tax income and categorising your expenses into fixed and variable expenses. Fixed costs don’t change, so these are your mortgage and loan payments, rent, insurance premiums, car payments, etc. Meanwhile, variable expenses can change, so utilities, groceries, and discretionary spending fall under this category.
Even if your income goes up, stick to your budget and don’t give in to the urge to spend more than you need to. Apps for budgeting can make this process easier and help you keep track of how far you’ve come.
Automate Savings
When you automate your savings, you won’t be tempted to spend more than you have. Set up automatic transfers from your paycheck to a savings account just for that purpose. If you treat savings like a non-negotiable expense, your savings will grow steadily. Over time, these contributions can really help you reach your long-term goals, like buying a house or retiring comfortably.
Set Clear Financial Goals
Set clear goals, like saving for a deposit on a house, building an emergency fund, or retiring early. Set small, doable goals and keep track of how far you’ve come. If you know why you’re saving money, you’re less likely to buy things you don’t need.
Avoid Bad Debt
Avoid getting high-interest debt from credit cards or personal loans for things you don’t need. Before you borrow money, think about whether it will help you in the long run or take away from your resources. Cutting down on bad debt makes sure you don’t give up long-term financial security for short-term pleasure.
Invest Wisely
Put your money into things that will help you reach your financial goals. This could mean putting money into a retirement account, buying assets that make money, or investing in education to improve your job prospects.
Practice Delayed Gratification
Impulse buys can add up and ruin even the best plans for your finances. Before you buy something that isn’t necessary, give yourself at least 24 hours to “cool off.” This way, you give yourself time to think about whether the cost fits with your priorities.
Review Your Expenses Regularly
Use tools to keep track of your funds to see where they go each month. Look for areas to cut back on, like subscriptions you don’t use, eating out too much, or services you don’t need. Change your budget to reflect what you learned and free up cash for more important things.
Limit Lifestyle Upgrades
It’s fine to celebrate financial milestones, but don’t make lifestyle changes that are too expensive or that go against your financial goals. For example, you should only think about getting a nicer car or a bigger house if it fits with your long-term plans and doesn’t hurt your savings. Instead, focus on living a simple life that helps you reach your goals.
Avoid Lifestyle Comparisons
If you always compare yourself to others, you’ll feel like you have to keep up with them even when you don’t want to. For example, you might not want that new gadget, but seeing all of your friends have it might make you change your mind. Don’t give in to the urge to “keep up with the Joneses.” Also, limit how much time you spend on social media so you don’t see the best parts of other people’s lives and get envious.
Recovering from Lifestyle Inflation
If you’re already experiencing lifestyle creep, it’s never too late to correct your course. Here’s how:
- Acknowledge the Problem: The first step to recovery is recognising that lifestyle creep has affected your finances. Be honest about your spending habits and their impact.
- Reassess Your Priorities: Identify what truly matters to you. Redirect your focus to experiences or goals that provide lasting value rather than fleeting satisfaction.
- Downsize Where Possible: Consider scaling back in areas where you’ve overextended. For example, move to a more affordable home or downgrade your car.
- Consolidate Debt: If lifestyle creep has led to debt, explore options like debt consolidation loans to simplify payments and lower interest rates.
- Rebuild Your Emergency Fund: Make replenishing your emergency savings a priority. Aim to set aside at least three to six months’ worth of living expenses.
- Seek Professional Advice: Consult a financial advisor to create a tailored plan for recovering from lifestyle creep and achieving your financial goals.
Final Thoughts
The first step to avoiding lifestyle creep is to know what the signs are and how to spot them. It’s important to stop spending more after a raise or bonus before it gets out of hand and causes your finances to become completely unstable.
The first steps to avoiding lifestyle inflation are to set clear financial goals, make a budget, and save money. Be financially responsible and don’t buy things on a whim. Most importantly, deal with the emotional parts of the problem by not comparing yourself to others and practising gratefulness. You can keep your finances in good shape even as you earn more if you take the right steps.
Avoid Lifestyle Creep with the Right Financing
With the right loans, you can avoid lifestyle inflation and work towards a financially stable future. Whether you need funds for smart investments or a loan to consolidate bad debts, we can help you make the right call. Reach out to us today.
