Financial Advice Blog

How to stop lifestyle creep from eating into your wealth

The more you earn the wealthier you'll be right? Learn why lifestyle creep is a trap and how to stop lifestyle creep eating into your wealth.

Picture this: you’ve just earned yourself a pay rise and, right on cue, you decide your Toyota doesn’t really fit with your new income. So you buy a Lexus. To go with your Lexus you clearly need a new wardrobe and, well, your furniture could use an upgrade too.  Welcome to the world of lifestyle creep, a phenomenon financial advisors are concerned is holding you back from creating financial freedom and a healthy retirement. Find out if you’re a victim of lifestyle creep and how you can stop lifestyle creep from damaging your financial future.

What is lifestyle creep?

You experience lifestyle creep when your standard of living improves as your discretionary income increases. Your improved financial situation may be due to an increase in your salary or a decrease in costs, but no matter how you come into more money the true hallmark of lifestyle creep comes down to your mindset.

If you find yourself living from paycheck to paycheck despite receiving pay rises and bonuses, then you’re in the grips of lifestyle creep.  Or if you go from seeing luxuries as, well, luxuries, to viewing them as a right, then you may need to pay attention to prevent lifestyle creep from eating into your wealth.

Why lifestyle creep is concerning?

Lifestyle creep has a way of seriously derailing your plans for how you would like your life to look like in the future, as it’s a mentality rather than just a habit. It’s the difference between being smart with your money – ensuring you invest and save, as well as spend within your means – and mindlessly splashing your cash because you can.

It’s also easy to fall for. First you start with smaller items, like going to fancier restaurants or eating Uber Eats most nights rather than cooking. But before you know it you’ve progressed from minor increases in your spending to wearing designer clothes and staying at 5-star resorts – all while not saving or investing a cent of your increased income.

Who’s most at risk of lifestyle creep?

Those of you who are nearly retired or a younger saver starting out in the workforce are most at risk of lifestyle creep and will feel its effects most significantly.

If you’re five to ten years away from retirement, the good news is that you’re most likely earning the most you’ve earned in your life, and you’ve probably paid off a large proportion of your debt if you’ve been planning correctly. The school fees are most likely finished and the kids have (hopefully) become financially independent, leaving you with more discretionary income than you’ve ever had before.

It’s what you do now that will determine the comfort of your retirement. Remember, the goal in retirement is to maintain the lifestyle you’ve always had. But if you suddenly up the ante, you’re going to need more money in retirement to keep your newfound luxury lifestyle. But the problem is that lifestyle creep saps your nest egg, as you spend your surplus cash flow rather than save it to bolster a more comfortable retirement down the track.

For the younger savers, it’s your first well-paying job that puts you at risk of lifestyle creep. It’s all very exciting when you get that first big paycheck.  Instead of saving and investing your increase, you might decide to spend it on luxuries instead. While you might be walking around in the latest luxury fashion, there’s a downside to your financial future.  You may struggle to get on the property ladder, have a HECS debt you can’t shake, and ultimately, less money in retirement.

How do I stop lifestyle creep?

You may believe that the more you earn, the wealthier you’ll be.  But this couldn’t be further from the truth.  In a study of 600 millionaires, Sarah Stanley Fallaw, Director of Research for the Affluent Market Institute, discovered six common factors more relevant to financial success than income.  After all, income becomes irrelevant if a person is living beyond their means.  It’s what you do with that income that matters.

The easiest way to stop lifestyle creep is to live within your means, allocating part of your income to save and invest.  Create a budget and segment wants and needs when it comes to your purchases. Allocate a set amount of your income to spending, saving and investing to ensure that you have a portion of your money working for you.

Another tool is to get really honest with yourself, assessing what’s more important to you.  Do you value instant gratification and consumerism or financial freedom? Write down your life and money goals and use them as a guide to help you make more conscious spending decisions down the track. Your ‘future you’ will thank you for it.

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