Key Takeaways
- Lifestyle creep is when you gradually increase (usually unconsciously) your spending as your income increases.
- It commonly manifests through upgrading homes, spending on luxury goods, dining out more frequently, or accumulating multiple subscriptions.
- To avoid lifestyle creep, start by creating a budget and following it religiously. You can dedicate a certain amount to savings each month and automate it to ensure you don't spend the amount on unnecessary things.
- It's important to set clear financial goals and review your spending regularly. Limit any upgrades to your lifestyle that may end up costing more than what you earn.
- Avoid racking up bad debts like high-interest personal loans or credit card debt. Instead, use your money to make smart investments.
- It's also important to practice delayed gratification and avoid comparing yourself to others. Shifting your mindset can help you avoid straining your finances.
- If you're already experiencing lifestyle creep, it's crucial to reassess your priorities and downsize your life where possible. Build up your savings again and handle debt through consolidation if needed.
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?
Lifestyle creep is when your discretionary spending increases along with your income. This phenomenon often happens unconsciously. For example, someone might upgrade their car, dine at expensive restaurants, or splurge on luxury vacations once they receive a pay raise. While these changes may seem harmless, they can snowball into a pattern that erodes savings and prevents 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.
Stick to your budget even as your income increases, resisting the temptation to expand your discretionary spending unnecessarily. Tools like budgeting apps can simplify this process and help you track your progress.
Automate Savings
Automating your savings eliminates the temptation to spend more money than you have. Set up direct transfers from your paycheck to a dedicated savings account. By treating savings as a non-negotiable expense, you’ll get consistent growth in savings. Over time, these contributions can significantly help you reach long-term goals, such as buying a home or retiring comfortably.
Set Clear Financial Goals
Set specific objectives like saving for a home deposit, building an emergency fund, or achieving early retirement. Break these goals into achievable milestones and track your progress. When you have a purpose behind your savings, you’re less likely to spend on unnecessary purchases.
Avoid Bad Debt
Steer clear of accumulating high-interest debt from credit cards or personal loans for unnecessary purchases. Before taking on any new debt, evaluate whether it’s an investment in your future or a drain on your resources. Reducing bad debt ensures you’re not sacrificing long-term financial security for short-term indulgence.
Invest Wisely
Focus on making investments that align with your financial goals. This could include contributing to a retirement fund, purchasing income-generating assets, or investing in education to enhance your career prospects.
Practice Delayed Gratification
Impulse purchases can pile up and derail even the best financial plans. Try implementing a “cooling-off” period of at least 24 hours before making non-essential purchases. This way, you allow yourself time to evaluate whether the expense aligns with your priorities.
Review Your Expenses Regularly
Use financial tracking tools to analyse where your money goes each month. Look for areas to cut back, such as unused subscriptions, excessive dining out, or redundant services. Adjust your budget accordingly to reflect your findings and free up funds for more meaningful purposes.
Limit Lifestyle Upgrades
While it’s natural to celebrate financial milestones, avoid making lifestyle upgrades that exceed your means or deviate from your financial goals. For instance, upgrading to a luxury car or a larger home should only be considered if it aligns with long-term plans and doesn’t compromise savings. Instead, focus on maintaining a modest lifestyle that supports your priorities.
Avoid Lifestyle Comparisons
When you constantly compare yourself to your peers, you’ll feel the urge to keep up with them even when you don’t necessarily want to. For instance, you might not want that new gadget, but seeing your whole friend circle own it may influence you otherwise. Resist the urge to “keep up with the Joneses.” Limit your social media exposure as well to avoid seeing the best of other people’s lives and feeling 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
Avoiding lifestyle creep starts with understanding and recognising the signs. If you’re noticing that you’re spending more after a raise or a bonus, it’s important to stop the habits before they snowball into complete financial instability.
Setting clear financial goals, budgeting, and saving are the first steps to avoid lifestyle inflation. Exercise financial discipline and avoid making impulse purchases. Most importantly, challenge the emotional parts of the problem by avoiding comparing yourself to others and practising gratefulness. With the right approach, you can avoid lifestyle creep and maintain your finances even as you earn more.
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.
