Lifestyle Creep; The Biggest Problem in Personal Finance

Last week, I chatted with an older friend(let’s call him Peter) who entrusted me with the ability to help him solve his financial problems. Peter approached me and decided to share with me his financial goals, the journey and the big problem he was facing.

For some background, Peter had just gotten a pay raise and would now be among the top 5% earners in the country.

As they say, more money does not always mean fewer problems; often, it creates even more problems. That’s what it did for Peter.

He now wanted to upgrade his SUV into a sports car, he wanted to build a bigger house, and he wanted to go on holiday with his wife in Europe over the Christmas holiday.

At the same time, he was still clearing some loans he had acquired to settle some financial emergencies that had occurred in the recent past.

His problem? He wanted to achieve all these goals as soon as he could. He was stressed because he was not sure how he would fulfil all these financial goals in the shortest time possible. Even though he was a high saver(he saved more than 60% of his income, though he saved to spend on other bigger expenses), he still would need good enough time to raise that money.

Even though I’m not a doctor, it took me just a few minutes to diagnose Peter with a disease many of us suffer from: Lifestyle creep.

As defined by Investopedia, lifestyle creep occurs when an individual’s standard of living improves as their discretionary income rises and former luxuries become new necessities.

Discretionary income is money you have left to save or invest after necessities are paid.

Like Peter, when you increase your income, things change pretty quickly. The house you live in starts looking small and unhealthy to live in, the clothes you wear start looking cheap and unfashionable, the food you eat tastes blunt, your car looks old and creaky, and you think the economy class is unfit for humans when travelling.

That’s the flu that catches everyone who experiences an increase in their income. There will be an urgent desire to improve your lifestyle.

As Michael Johnson put it,

“A poor man knows the true value of money and will not dare waste it. A rich man(on the other hand) is extravagant and is always looking for an opportunity to empty his pockets.

Why lifestyle Creep is Bad

You probably have heard of the cliché, “it’s not how much you make that matters; it’s how much you keep.” That quote is a cliché, for a good reason. It’s true.

You see, when you increase your income and maintain your expenses, you will end up with more discretionary income than before. In short, you will have more money to save and invest than before.

On the contrary, when your expenses rise with your income, your savings will remain the same. You won’t have a more significant amount to save and invest.

The Biggest Challenge in Personal Finance

In the psychology of Money, Morgan Housel writes,

“The hardest financial skill is getting the goal post to stop moving.

If expectations rise with results, there is no logic in striving for more because you’ll feel the same after putting in extra effort. It gets more dangerous when the taste of having more money, power, and prestige increases ambition faster than satisfaction.

In that case, one step forward pushes the goal post two steps ahead. You feel as if you’re falling behind, and the only way to catch up is to take greater and greater amounts of risk.”

True to Morgan’s words, Peter was feeling as if he was falling behind. His ambition was increasing faster than his satisfaction. And even though he had gotten a high-paying job, it brought him more evil than good.

How To Overcome Lifestyle Creep

If you listen to most financial gurus, they will tell you that lifestyle creep is terrible, and you should stay away from it.

My dad is one of the people who dread lifestyle creep and has managed to fight it. At some expense though. For example, he will have trouble upgrading his pair of shoes or even buying himself a new suit. Not because he doesn’t have the money, but because he understands and has experienced the harmful effects of lifestyle creep.

But that’s not how we ought to live. The main goal in life is not to maximize our wealth but to achieve happiness and satisfaction in life. Why would you work so hard and build so much wealth without improving the quality of your life?

Wealth is What You Don’t See

The only way you can manage to upgrade your lifestyle and still save enough of your raises is by upgrading your life slowly. This means that you will delay most of your desires even though you can afford to satisfy them immediately.

This will give you enough time to accumulate your savings, invest more, and have some lifestyle upgrades that may not hurt you financially.

Morgan Housel writes,

“But the truth is that wealth is what you don’t see.

Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first class upgrade declined.

Wealth is financial assets that haven’t yet been converted into stuff you see.”

What Level of Your Raises Should You Save?

When most people get a pay raise, most people will expect that you should save more money(which is true). But nobody will tell you that you should also live a little bit more.

The problem is not lifestyle creep. The problem is the speed and the level at which you suffer from lifestyle creep.

Because I believe, almost everyone suffers from lifestyle creep. We work hard to make money that will help us improve the quality of our lives. No one makes money to live a poor life and in worse conditions.

In his book, Just Keep Buying, Nick Maggiulli, takes an exciting approach to how much of your raises you should save.

“A little lifestyle creep is okay, but keep it below 50% of your future raises if you want to stay on track.”

Nick Maggiulli

Final Thoughts

The biggest argument in personal finance is whether to focus more on raising your income or cutting down on your expenses. One camp believes it’s easier to cut your expenses than to increase your income. While the other camp believes that cutting on your expenses has a limit while raising your income has no limit.

I think both camps are correct, but one is more accurate.

You see, your money game can either be defensive or offensive. It’s either you outearn your expenses, or you underspend your income.

But as you choose your style of play, remember there’s no limit to what you can earn. But there’s a limit to how low you can cut on your expenses.

With all that said, even as your income increases, your financial goals will remain sand castles in the air if you do not check your expenses.

For if yours is to spend all your raises, financial success will always elude you!