INSIDE: The how, what, when, and where of the lifestyle creep. Otherwise known as lifestyle inflation and the thing that sucks up all your money the more you earn!
[Morning! Please enjoy this guest article today from my boy Nick over at Side Hustle Nation who stops by the blog to share the evils – and perks? – of lifestyle inflation with us. Always gotta stay vigilant as it’ll get you good if you’re not paying attention! Help us out, Nick!]
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Most of what you’ll find on the Internet are articles on how to avoid lifestyle inflation and why it’s “the biggest threat” to your financial future.
Perhaps there’s some truth to that, but I think if you allow yourself to “creep” with intention, you, your family, and others can all be better off.
After all, isn’t that the point of making more money?
In this post, I’ll attempt to cover:
- What lifestyle inflation is
- Why it’s potentially super-risky
- How to consciously evaluate “creepy” decisions
- The alternative: lifestyle optimization
What is Lifestyle Creep (Lifestyle Inflation)?
Before we get too deep into it, it might be helpful to offer up a definition of lifestyle creep. Lifestyle creep, or lifestyle inflation as it’s sometimes called, is the process of living up to your means.
It means increasing your spending as your income increases.
Let’s say you earn $50,000 a year. If you’re anything like the average American, you’ll end up saving a little over 5% of that.
Consider that 5% of $50,000, or $2,500, your annual profit margin for the year. In other words, your lifestyle cost $47,500 that year.
Now let’s say over the course of a few years you end up changing jobs, starting a business, or getting a series of raises. Now you’re earning $100,000 a year.
If you kept your lifestyle costs the same as they were when you were making $50,000, you would have just had a very profitable 12 months!
But in most cases, as you earn more, you start to spend more too. And that $47,500 lifestyle quickly becomes a $95,000 lifestyle.
It doesn’t happen overnight; it just “creeps” up on you. That’s lifestyle inflation.
It’s only natural — you can afford it!
A nicer car, a bigger house, better clothes, fancy vacations, expensive restaurants. Those are all common ways your lifestyle can begin to creep back toward that average 5% savings rate.
Why is Lifestyle Inflation Risky?
Lifestyle inflation has been called “the biggest threat to financial planning.”
But what’s so bad about rewarding yourself when you earn more?
The main issue financial planners and other money nerds get worried about is having enough. And “enough” is commonly defined as 25x your annual expenses.
Save that much and invest it responsibly and you’re theoretically set for life.
That means at your $47,500 annual lifestyle cost, you’d need to amass a nest egg of almost $1.2 million.
But at a $95,000 lifestyle cost, you’d need double that–almost $2.4 million.
And that’s the biggest risk and downside to lifestyle inflation: it prolongs your path to financial freedom. And in some extreme cases, may even make retirement unattainable–at any age.
What’s the ultimate lifestyle upgrade? How about being able to spend your time however you want.
How to Avoid (Ineffective) Lifestyle Inflation
Lifestyle inflation is often associated with a “keeping up with the Jones'” mentality. At its worst, it’s a rush to buy stuff we don’t really need that makes zero impact on our long-term happiness.
Indeed, researchers have found a surprising trend they’ve called “hedonic adaptation.” This explains humans’ tendency to return to a baseline level of happiness relatively quickly after things happen to them–good or bad.
It explains why people who win the lottery aren’t the happiest people on the planet. In fact, many wish they’d never won in the first place.
So how can you avoid unnecessary or ineffective lifestyle creep?
#1. Establish a Comfortable Baseline to Avoid Lifestyle Inflation
Make sure your basic needs are met. If you’re hungry or don’t have a safe place to live, those are naturally “lifestyle creeps” that make total sense!
#2. Treat Your Household Budget Like a Business
Thinking about your budget and surplus income as household “profit” is my favorite way to re-frame spending. As income increases, we become more profitable.
To be sustainable, a business needs to make a profit.
Your household is the same way. You can’t lose money every year — or even break even — and survive long-term.
But businesses spend money too. They just spend on those things they think will generate a positive return.
Consider the same with your household spending.
Will that bigger house make you happier in the long-run? It’s possible. But it might also mean a snowball effect of higher utilities, maintenance costs, weekends spent doing yard care, and expensive home improvement projects.
#3. Sit on it
When you’re making a big purchase decision, or even some smaller ones, can you revisit it next month? Or next year?
If that inaction saves you hundreds or thousands of dollars a month, that’s worth a huge amount to your long-term financial independence.
This is a really important one when it comes to overcoming lifestyle inflation.
Because of compound interest and the time-value of money, the longer you can defer lifestyle inflation, the better off you’ll be down the road.
We have an inherent understanding of this. At retirement, an extra $500 a month invested when in your 20s will be worth a lot more than an extra $500 a month invested in your 50s.
After graduation, I was in a big rush to “grow up” and get a place of my own. Looking back, I think that was a mistake.
Living like a college student for even just another year or two would have made my personal profitability much stronger as a young professional.
How to Evaluate New Spending to Avoid Lifestyle Inflation
In our house, we have a few frameworks we use to evaluate new spending.
Know What You’re Really Buying
The first is trying to determine what we’re really buying.
Are we buying quality time, sanity, experiences? Are we helping others? Are we taking away some significant pain?
This is inspired by Tim Ferriss, who recommended asking something like this: “How can I ‘waste’ money to make life easier or better?”
If we can be confident our money will have a positive impact on our well-being or happiness, we gladly part with it. That’s one reason we travel as much as we do and why the kids go to daycare (more on that below).
Is it a One-Time Purchase or a Recurring Expense?
The other important consideration to make when evaluating new spending is whether it’s a one-off purchase or a new ongoing monthly expense.
Naturally, we’re quicker to make one-off purchases that make our lives better than commit to a new recurring cost.
Is it a Band-Aid or a Permanent Fix?
Does the purchase solve the root problem?
Or does it just mask a symptom?
If the problem is temporary, a “Band-Aid” solution is probably fine. But for longer-term problems, you’re better off buying a permanent fix.
Is it Easily Reversible?
Before I buy something, I almost always check the return policy. If I don’t like it or change my mind, can I get out of it?
On bigger purchases without a return policy, could you re-sell the item to another owner?
Does this Purchase Have a Snowball Effect That Will Lead to Lifestyle Inflation?
Some purchases don’t end when you sign on the bottom line or swipe your credit card. Some end up costing you more for years down the road.
That bigger car? Yeah, it’s going to cost more to fill up every time you need gas. It’s going to cost more to insure. It’s probably going to cost more to maintain.
That bigger house? It’ll cost more to heat and cool. You’ll pay more in property taxes and mortgage every month. You might need more furniture.
But it’s not all bad — some “snowballs” are good. What if you move closer to work? There’s a positive snowball effect there of shorter commute times, less money spent on gas, more time with your family.
And that leads me to my counterpoint about lifestyle creep. What if we approached new spending as a chance to optimize our existence?
The Alternative: Lifestyle Optimization
If there’s one thing that gets me fired up, it’s the idea of optimization, progress, and improvement. (In fact, we gave our first-born the middle name Kaizen, meaning “continuous improvement.”)
So instead of blindly letting your lifestyle “creep,” consider how you can use your money to optimize your life.
What would that look like?
What’s the right balance of spending, saving, and giving?
Ramit Sethi argues that you should spend “lavishly” on the things you love, provided you ruthlessly cut costs on the things you don’t.
What could you buy to genuinely make your life (and the lives of others) better, not just today, but in the future as well?
That’s lifestyle optimization, and really that’s the whole point.
Where Have We Optimized?
While our household is still solidly profitable, we certainly spend more than we did a few years ago.
Here are some things we spent / are spending money on:
- An e-bike. I freaking love this thing. We ride to preschool almost every day and I ride it downtown as well. So far it’s taken 750 miles off my car. (An example of a one-off purchase that saves money and brings joy.)
- TSA Pre-check. This is a total unnecessary luxury, but it just makes me happy every time I go through security. At $20 a year for 5 years, including Global Entry, it was well worth it.
- Running the air conditioning more. Even though the heat is usually pretty temporary, we’re more apt to cool off the house these days.
- Renewable energy. For our monthly power bill, we had the option to pay a little more to use electricity from 100% renewable sources. It was an easy decision.
- Health. Not that we ever ate really poorly, but we tend to buy supposedly cleaner, healthier food. I go to a weekly yoga class for flexibility and injury prevention. I started getting annual WellnessFX blood tests.
- Books. I still get a lot of books from the library, but if I see a title on Kindle I want to read, I’m quick to order it.
- Clothes. I don’t buy a lot of clothes, but when I do, I try and get something that fits well and will last. Sorry Old Navy!
- Giving. This is still a work in progress, but supporting causes we care about is becoming a higher priority.
- Slower travel. Recognizing that the transportation part is the most difficult part of travel for us these days, we’ve opted for fewer but longer trips if that makes sense. Fewer 3-day weekends and more week-long trips.
- Daycare (see below).
Most of these aren’t huge expenses, but make us happier people.
Kids: The Ultimate Lifestyle Creep?
Daycare for our two boys is our biggest line-item expense at the moment — over $2,300 a month.
Save for college? How about save for daycare; it’s immediate and it sure ain’t cheap!
But that daycare is part of our lifestyle optimization plan. It allows our boys to learn critical social skills, interact with kids and adults outside of home in a safe and structured environment–and importantly, it frees up time for me and mom to work. Work, I should add, that we both find fulfilling.
Studies show that raising kids costs $200,000 on average–not including college. But if you dig into the numbers, a big chunk of that is in buying or renting a bigger house. That’s one reason we’re trying to delay that as long as we can.
Could Kids Be Saving You Money?
I saw one semi-depressing anecdote the other day. It was from a parent responding to one of those “how much it costs to raise kids” articles.
Her argument was that kids actually save her money — because she’s stopped traveling and eating out!
For some parents, high achieving offspring are their retirement plan! No pressure, little ones :)
[EDITOR’S NOTE: Are you sure that wasn’t me? Haha… Here are 7 ways my kids save me money ;)]
Where Side Hustles Come In
As your income increases, look for ways to optimize your lifestyle.
That could mean eating healthier. That could mean building an emergency fund. That could mean giving to charity.
But don’t just blindly spend more just because you can. Lifestyle inflation will get you every time. Spend with intention and I’m confident you’ll be happier as a result.
How has your lifestyle crept over the last few years? Are you happy with your return on investment from the increased spending?
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Nick Loper is the Chief Side-Hustler at SideHustleNation.com and quite possibly loves the hustle even more than J. Money… He’s also an avid skier, author, business nerd, podcaster, Seattle sports fan, and a parrothead. He can be found on Twitter at @nloper.
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Having switched career paths several years ago and taking a 50% pay cut (which we could afford because we didn’t give completely into lifestyle creep) we are spending more now that our income has recovered some. The main thing to remember is practicing moderation. Your #1 tip to establish a baseline is crucial.
For example, we travel more but still use VRBO or Airbnb and drive instead of fly our family of 4, we paid $10k last year for a used family vehicle instead of $7k for one that was older and smaller because we didn’t have an extra $3,000 to buy that larger vehicle we knew was the better long-term option. We also buy organic food instead of conventional (this is important to us). Most importantly we don’t delay large purchases to upgrade or replace items we use daily.
Well done on making moves like that with your career! Not an easy thing to do!! (Financially AND mentally! ;))
Love this counter-perspective on lifestyle creep! Smart personal finance is not just about frugality, it’s also about making wise choices about how we use our money. As a working mom, I’ve come to rely on Instacart for our groceries. I just wrote an article examining how much it actually cost me to use Instacart (it’s about $11-$12 per order), but it saves me SO MUCH TIME (nearly 3 days of time so far) that it is money very well spent in my opinion. I was initially hesitant to use a service like Instacart because its hard for me to pay other people to do things that I an do myself. My inclination is to push back against lifestyle creep like grocery delivery. But NOT doing grocery shopping myself has added so much value in my life – it gives me so much time back for other things that only I can do (like spend time with my family/kids, work on my blog, etc.). Great article and thanks for this alternative perspective!
Not to mention *dread* too if you hate shopping as much as my wife does! She was in heaven when we used Peapod for a few months after our 3rd was born :) I wonder how that compares to Instacart?! Did you try out a bunch of different services or just fell in love with them and stayed?
Hi J! I’ve never tried Peapod because the store they contract with here locally has high prices and weak customer service. I first heard about Instacart on an NPR podcast that interviewed the founder and was super impressed with their commitment to customer service. I order from Aldi through Instacart, which makes the mark-up almost negligible given Aldi’s rock-bottom prices. I did a nerdy analysis of how much the mark-up is at Aldi and Costco through Instacart, if you’re curious to see a side-by-side comparison: https://workingmomlife.net/personal/how-instacart-has-saved-me-nearly-3-days-of-time/
I totally recommend it! I don’t mind grocery shopping, but given how little time there is to spare when you have young kids, this is one way we’ve optimized ;)
Beautiful – thank you!!
And I hear you 100% on the kids, haha…
Going right now to wake mine up to get them ready for school :)
Hi J,
Great article, and a perfect explanation of an affect I saw all the time in my life. Expenditure grows to fill the void created by increased income.
Over the last few years of having kids when I complained about expensive outgoings, my wife would say things like ‘yes, but soon we won’t be spending on expensive items like nappies/diapers, baby formula…’ And whilst that was true, in the subsequent months I didn’t notice any uptick in extra cash.
A big recent ‘creep’ was when we stopped paying for childcare, at £350ish a month. We couldn’t wait for this to come to an end once our youngest went to school. Have we noticed an extra £350 a month kicking around? No, but that saving was made, but it must have been swallowed up elsewhere. I even remember suggesting we instantly bank that £350 a month into a savings account, but was told we’d need it for [insert random expenditure that I cannot recall].
There’s always next month, right, when the expenditure will be lower? But often it never is. The key here, I guess you’re already thinking, is budgeting. Where does the phantom ‘extra’ cash go?
We’re working on that. In the meantime, time to upgrade my TV services for shows I’ll never watch
Keep up the good work, Tom
Haha… got me good on that last one ;)
I say you just start auto xfers this week and then work around it like you were doing w/ the daycare!!! Set it to like £100 for now and see what happens? No reason you can’t pretend like the expense just left yesterday? I bet it would make you feel good! :)
My mother-in-law actually gave me this tip: instead of direct-depositing her whole paycheck into her checking account, she only had deposited what she knew she’d need every month based on a very detailed budget. Everything else went to savings/investments, even as income increased.
Nice piece chocked full of information.
Eating out and adding an appetizer and another glass of wine is where we fell into the creep trap. This usually added $30.00 to the dinner tab. Even today at Fat Fire and a W-2 job, we forgo these dinner upgrades.
No, we don’t invest the $30.00. It goes into the kitty for another eat out dinner…..in about a month.
Two outings are def. better than a more supped up one – I concur.
Yes — perfect example of lifestyle optimization!
My conscious effort to not lifestyle creep when I got my first after-uni job (thanks to the advice from my cousin, a financial advisor) enabled me to overpay my mortgage in my bachelorette apartment so when it came time to buy the “fancy” apartment with a little garden and a study I could do so. I had paid off way more that I would have which then gave me a bigger deposit to put down on the next one. As the Spice Girls once said in a supermarket advert in the UK, “Every little helps!”
Haha, well done…
And now you’ve got me wanting to see what that fancy apartment of yours looks like!!
Pics please!! :)
I so agree with you on the point to allow yourself some rewards as your income increases. As we went along in life we lived way below our “my husband’s” income. But once the retirements were fully funded I felt that a little splurge here and there was a positive thing. One, besides a house and basic Camrys bought new (I know ) but they have always been kept 10+ yrs and were never financed for over 4 yrs and usually at 0%. Beyond those items have never carried debt in over 35 yrs of marriage. But what is the point of working 80hrs to earn a great salary if you can’t splurge on a nice upgraded vacation, not worry about going to a baseball game or even be able to help out a relative in need. We want enough for a solid retirement, but beyond that you can’t take it with you. Enjoy it. I know my husband has earned it.
Great attitude Darlene! We felt similarly — once we got to the point of having “enough”, it’s become easier to spend on “life upgrades.”
Great article but near the end one item really jumped out at me. How cool is it that Nick could choose what power source he got his energy from. Renewable all the way ! Let’s have our money tell an important message and keep shifting to sustainable choices.
Thanks Chris! Definitely something we’ve become more conscious about, and even moreso after having kids.
I haven’t allowed myself a “raise” in 10 years… every year my 401k contribution goes up the same % as my raise.
This does kinda keep lifestyle creep in check. However, when one expense goes down or goes away, it seems I just use it to fund something else – that isn’t always an “optimization”.
Need to look into that more!
Smart move w/ the 401k increases!!! Investments go up without feeling any pain! ;)
Great Article!
I haven’t allowed myself a ‘raise’ in forever – my cost of living is the same as it was when was paid 1/3 what I was today.
Most of my peers do the opposite, and they run around, buy silly expensive cars, rent massive houses, multiple huge holidays a year. They’re still not happy.
There is a lot to be said for finding contentment elsewhere and not getting on the consumerist bandwaggon.
The great thing about the UK is you can place most of your extra income in a pension for 0% tax at point of contribution. It’s really easy and tax efficient to just save that way – you can’t touch the money until you are 55 as well. I just plough raises into pension nowadays.
Well done man!! You must be stashing like crazy over there!
I really enjoy your list of things you optimize. It’s almost like asking yourself, what are the things that you value the most? And being intentional to not spend on the things that you don’t value. Something on my own personal optimized list would be camping equipment. My husband and I really value our time camping and we try to get out often. So we have some pretty good equipment, but we also know that it will last us a long time and we will get a lot of enjoyment out of it!
I love that you invested in an e-bike. We both have normal hybrid bikes that are in working condition, so we’re not ready to make the leap yet. Eventually, we do want e-bikes, since that’ll make going up hills a lot easier and a less sweaty occasion. It’ll make us want to bike more too. TSA Pre-check and global entry are great too, especially if traveling often. Even when not traveling often, we’ve considered it since waiting in line sucks. Great post overall!
When I went from renting a room in a condo, to buying my own house, that was the biggest impact to my spending – it’s been nearly 10 years of significantly higher housing costs – I went from $800/month to about $2700/month – including HOA and property taxes. It was a conscious decision, and it was done so that I could pay off my mortgage in 11 years, instead of 30.
In under a year, my housing cost will go back down to just under $750/month – HOA and property taxes – and I will have an asset that has more than doubled in value.
The trick will be to continue to use that mortgage money in productive ways – automatic investing – so that it doesn’t get frittered away each month!
Nicely played!!
That’s gonna be a huge chunk back into the cash flow for you – way to pull it off in the end, that’s not easy!