What is Lifestyle Creep?
Like most of Americans, I spent a couple days this month scouring Amazon’s website. Amazon has managed to pick a random day in the middle of summer and turn it into another day for mass consumerism. Prime Day! I attempted to only focus on discounts for products that I needed, but I caved to some deals. This year it was an electric toothbrush. I used it for the first time this week and I feel like a new person! I am very happy with the purchase. I can’t imagine ever going back to the basic battery powered toothbrush.
You may think that this article is going to explain how much we waste on buying junk like this each day. Why does it seem impossible to walk out of Target, WalMart, or Costco without spending $200 when we just needed a couple of things? While that is a major issue and deserves recognition, today’s post is about something else. I’m going to go into detail about something called “Lifestyle Creep” and how it can destroy your financial goals.
Lifestyle Creep is exactly what it sounds like. Humans have a tendency to spend money when they have it. We settle into the lifestyle that we can pay for. As our income goes up throughout our career, our spending does the same thing. The term is perfect because it usually happens slowly and gradually. We start buying things, like electric toothbrushes, that we wouldn’t have considered in the past. One way to notice someone experiencing lifestyle creep is if they use the phrase, “I thought it was so expensive back then, but now it seems reasonable.”
Another way to observe this is to look at an exception to the rule; doctors (not all of them, luckily!). Doctors live like college students for years. Once they graduate, they have a significantly higher salary and their lifestyle jumps with it. Have you ever noticed how recent med school graduates will run out and buy a brand-new BMW? I can’t say I blame them! They can now afford luxuries that were not possible during school. We notice big lifestyle jumps like that much easier. Lifestyle creep happens much more slowly.
Why does this matter? Why do I think this is something that can destroy your financial goals? Here’s the thing. Once your quality of life increases, it is hard to go back. I already mentioned my toothbrush example but let me give you a couple more.
Cars – Have you ever driven a Mercedes? I used to work at a car wash in high school and I have a vivid memory of how comfortable this particular Mercedes was. This isn’t to say that Ford cars are not comfortable. It’s just that there is a noticeable difference in the quality of these two cars. I’d hope so considering the price difference! You won’t want to go back to driving a Ford if you get used to driving a Mercedes. You have created a new standard of expectations for the car you drive.
Clothes – I’ll use workout clothes as an example because I am most familiar with them. Brands like Nike, Under Armor, Reebok, and Adidas make quality workout clothes. They will do the job last a long time. Lululemon clothes are roughly double the price of anything you can buy from the other companies. I have received some Lululemon products as gifts and I can understand why people are willing to spend the extra money. It’s the same concept with other types of clothing such as dress clothes and jeans. Your standards become higher once you become accustomed to higher quality.
Let me be clear. I have no problem with people enhancing their lifestyle when they can afford it. I don’t expect people to live like a college student forever. We all deserve to reap the benefits of a successful career and years of hard work. Just be aware that when you allow yourself to buy higher quality products that you will probably want to continue to use products of the same quality.
This article may sound like a lecture on how you shouldn’t spend money, but I don’t want it to be! Here’s what you need to do to avoid issues with lifestyle creep.
1. Start saving – Before you go buy your Mercedes, ask yourself, “Should I be putting more money into savings?” Your savings rates should be set up to reach your goals before increasing your lifestyle to the next level.
2. Define happiness – What lifestyle would you be comfortable living for the rest of your life? It may be your current one.
3. Choose your lifestyle enhancements ahead of time – Which aspects of your life do you want your extra money to go towards? Is it nicer cars, more travel, or nicer clothes? Thinking about it ahead of time will allow you to direct your money properly when you are ready to increase your lifestyle.
4. Create a plan – You can’t answer these questions without having a plan.
Lifestyle creep doesn’t have to be detrimental to your financial situation. They key is to create a plan and start saving a percentage of your income early so that your savings increases even if your spending increases as well. When retirement rolls around, you will want to maintain the lifestyle that you have built up to during your career. Your retirement savings should be enough to maintain that lifestyle until death. Don’t be afraid to buy nicer things in life when you can afford them. Just remember that you need to be able to afford them forever and not just this year.
Mike Zeiter, CPA/PFS