Investopedia defines lifestyle creep as “The phenomenon where discretionary consumption increases on non-essential items as one’s standard of living improves”. Going further, it reads “With lifestyle creep, luxury goods and discretionary spending become perceived as a right to have and not a choice – as a necessity versus a want”.
In other words, as income goes up so do expenses. The word creep has a negative connotation and rightfully so. Slowly, imperceptibly, your spending increases while you barely notice. Maybe one day you’re making $X and buying your groceries at Acme and the next, your making $X+ and you’re buying your groceries at Whole Foods. You’re still buying the same groceries, you’ve just made the decision that Whole Foods is better or healthier and, since you’re making more money, you can afford that.
Maybe it’s time for a new car and rather than buying the middle-of-the-road model like you always have, you buy the one with all the bells and whistles. (Maybe it even has a navigation system that no one uses anymore.) But you rationalize, “my peers are driving the Mercedes SUV, I just went with the Ford (with every option possible)”. So, rather than a $400/month car payment, you now have a $650/month payment. Probably not going to break the bank now, but an additional expense that “crept” into the picture. Slowly but surely. And, next time you go to buy a car, what are the chances you go back to the middle-of-the-road model? You’ve now set a new normal.
Now, repeat this trend across the thousands of things (at least in my household) you spend money on every year. A few dollars here plus a few dollars there equals many few dollars in the end. (I was a Finance, not English, major in school.)
So, what’s the harm, right? Your income supports your spending, you’re not racking up credit card debt, you’re still saving to your 401k, maybe even to your kid’s education. So, what if you want to live a little?!
To this I would say, you’re right. You deserve to enjoy the fruits of your labor now. It’s not about saving everything for the future. The issue arises when your lifestyle increases but your savings don’t increase alongside. You’ve now created a situation where you plan to retire someday but all along you’ve been saving enough to fund the old lifestyle in retirement; not the new one. Ask yourself what you would cut out of your future lifestyle. I had a conversation with clients that wanted to build into their plan a 5% decrease in spending each year in retirement (no surprise, he was an engineer). When we looked at what they would cut out – putting the 5% in dollar figures – it became apparent that spending decrease wasn’t going to happen. Mrs. Client thought the golf club membership was a good one to cut; Mr. Client didn’t see it the same way….
So, what can we do?
1. Be Aware – Again, it’s called lifestyle creep because it happens slowly and we’re often not aware of it. Take a minute at the beginning of the new year to figure out what it costs you to live. Don’t get bogged down in the details; go big picture. Log into your bank’s website, download all your expenses in 2019, take out any expenses that will not recur, and divide by 12. Set this as your baseline spending for 2020 and track it periodically throughout the year to see if you’re on pace.
2. Make Money Decisions on Purpose – If you receive a raise or bonus this year, make a conscious decision to allocate that money appropriately. Just letting it flow to your checking account means it’s there for the spending. You may have good intentions for the money but if it’s just commingled with everything else, it has no meaning or purpose. Ever been standing around food at a party and just eat because the food is in front of you? You’re not hungry, but that doesn’t matter. Same principle – the money is right in front of you and easy to spend, so you do.
3. Have a Plan – Figure out how much you need to save each year in order to continue to support your lifestyle. If you don’t know how much you need to save, you won’t see any need or benefit to saving more. If you don’t know how to figure that out, we can help. My wife – before we reviewed our own financial plan – called our savings a “black hole”. All muddled together in her mind with no defined purpose or goal. Linking your savings and investments to goals will make you more apt to save and invest; increasing the probability of reaching those goals in process.
For 2020, I encourage you to remove the creep in your life. To a healthy and prosperous New Year….