You’re out shopping with friends, and you notice a pair of joggers and a new sweatshirt that you really like. You check the tags. Normally, the item would be out of your budget, but because you just received a raise at work, you figure you can afford to start spending more on items you want. You then add the outfit to your cart. This scenario is a small example of lifestyle creep, but it is a common personal finance trap that people struggle with. Read on to learn what lifestyle creep is, how it occurs, and the steps you can take to avoid it.
What is lifestyle creep?
As a college student, you likely live a pretty modest life. Therefore, when you graduate and begin to earn more money, you might be tempted to greatly increase your quality of life. This may involve spending more on name-brand clothing, entertainment opportunities, classy decorations, and a variety of gourmet groceries, but it may also include moving into a nicer apartment or upgrading your car when you are financially able to do so. When your standard of living increases as your income increases, it is known as lifestyle creep or lifestyle inflation.
When you have more money in your bank account, you are less likely to think before you make a purchase, which can lead to spending most or all of your discretionary income. Your discretionary income is the amount of money you have left over after you pay taxes, rent, utilities, and any other required monthly payments. This money is essentially known as your “fun” money, but spending extra money whenever you have it can lead to negative effects long-term.
How does lifestyle inflation happen?
When you’re in college, you may be living on ramen and cereal, but there is no reason you have to be so wary of lifestyle creep that you continue to only eat these foods after you graduate. You may also want to trade in that outdated car for something more reliable or get a nicer apartment. It’s natural for your lifestyle to improve after getting your first job, meaning that some of your expenses will increase; however, when you get your first raise or a higher paying job elsewhere, it is important to avoid major changes in your spending habits.
To understand how lifestyle creep occurs, it might be easiest to put it into a number problem. Let’s say that in your first job after college, you earn approximately $4,000 per month after taxes are taken out. Assume that half ($2,000) will go to your rent, bills, and required expenses, while $1,000 will be used for needs like groceries, gas, etc. This leaves the final $1,000 available for spending on whatever you want. Saving for retirement and adding to your emergency fund would be beneficial, but more often than not, this remainder is spent on wants.
The following year, imagine you receive a nice pay raise. Now, when you plan out your monthly budget, you’ll have roughly $5,000 after taxes. Because of your raise, you decide to move to a better apartment. Although it’s more expensive, you’ll finally have some distance from your annoying neighbors. Now, $3,000 is used for your required expenses, like rent, utilities, etc. Your variable expenses, like gas and groceries, still require about $1,000 of your income. Finally, you’re left with a discretionary income of $1,000. You assumed that with your increase in your income, you would have money leftover to save or add to your retirement account, when in reality, your cost of living went up.
Instead of saving or investing for their future, people often increase their spending habits when they are financially able to. If you don’t want to live paycheck to paycheck, you will need to find a way to increase your income or decrease your spending to avoid dispersing all of your additional money.
How do you avoid it?
Avoiding lifestyle creep doesn’t mean ignoring every luxury product or vacation opportunity for the rest of your life; you just have to make sure that the lifestyle you are leading is sustainable. One-time rewards can help keep you motivated, but those same rewards become an expensive habit if you treat yourself too much. Besides keeping a monthly budget, there are several ways to avoid lifestyle creep in your day-to-day life.
1. Pay yourself first
Think of saving money as a monthly bill. It needs to be paid on time, but instead of paying another company, you will be paying your future self. You should try to commit to saving a certain amount, even if it is only a few dollars, per month. Setting the money to automatically transfer from your paycheck to your savings account will ensure that you won’t be tempted to spend the money on items you don’t need.
2. Focus on financial goals
Take a moment to write down your financial goals. You can plan to pay off your student loans, build your credit score to 750, or become a homeowner. Once you have an idea of what you want to achieve, you will likely find it easier to start saving money. In theory, you will make fewer little purchases when you are working towards your big financial goals.
3. Don’t hang out with spendy people
Another way to avoid lifestyle inflation is to avoid spending time with people who like to spend excessive amounts of money. Many people get influenced into buying things or paying for certain activities because friends or family pressure them to do so. It’s often a smart idea to be upfront and suggest alternatives to expensive activities that don't fit into your budget. Sometimes, it is best to just say a firm no.
4. Only use your credit card for needs
Another reason people get into trouble is that they swipe their plastic card for every purchase. Credit cards have many benefits, but because they allow you to spend more money than you may have, you must know how to use credit cards responsibly. A good habit is to only use your credit card for needs, like gas and groceries. This regular usage can help build your credit score. In addition, it will help ensure that you have enough money to pay off your statement in full each month to avoid paying interest on your purchases.
5. Unfollow brands or unsubscribe from emails
There will be times when you are studying on your laptop or scrolling through your phone when you see an enticing ad pop up. These ads are meant to catch your attention and collect your money. Although most of the time the ads you are seeing are good sales at your favorite stores, sometimes you may need to unfollow a certain brand’s social media or unsubscribe from their emails to avoid temptation, especially if you are impulsive
6. Avoid comparison
Comparison is the thief of joy. This phrase not only rings true throughout all of life, but especially when dealing with lifestyle creep. As a consumer, you don’t have to keep up with the Joneses or buy things to achieve a certain social status. If you stop comparing yourself to others now, then you will have more money to save for your future.
The biggest takeaway is that no matter how much you are making, you need to be intentional about avoiding lifestyle creep. The moment you begin to think, “it’s just money” is the moment that you begin to lose the power of restraint, making it easy for your money problems to spiral out of control. On the other hand, it’s important to not be strictly business. You’ve often heard that you need to save for retirement and save for your future, but there’s also a lot of life to live in between now and then. The goal is to find the happy medium between being extremely frugal and excessively spending. If you can find the middle ground, you will live a financially successful life.
🛍️Need help avoiding unnecessary purchases? Read 10 Simple Ways to Reduce Impulse Buying.
📈Want to begin saving more money? Read 6 Smart Ways to Save for Your Future.