What is Lifestyle creep?

Lifestyle Creep is the act of spending more money because of receiving more money. Whether those funds are from a pay increase, a windfall like winning the lottery, a settlement, or an inheritance. 

The concept of lifestyle creep is not immediately seen or understood, as the idea of having a pay increase or “coming into money” should mean that you get to spend more money. However, to maintain our net worth, and for it to continue to increase, there will need to be a limit on how much of that increase you are going to spend. 

If the increase in spending is at the same rate as the increase in additional funds, that is the definition of lifestyle creep. You are spending all your additional monies and none of it is going to savings and/or investing. 

It is easy to get caught up with additional lifestyle cost, as the extra funds can be seen as valid grounds for the surge in spending. For example, you have received a promotion at work, one that makes you a lot more visible than your previous role. You are now attending more meetings or conferences or facing more clients and you immediately think, I need a new wardrobe. I need a new car to match the expectations of my new prestigious role. 

Examples of expenses that can slither into your monthly or yearly cost include membership clubs, holidays and even a change of residence. The perception of doing well can cause individuals to not only spend the increases they receive, but also overspend to the point where they put themselves in debt. 

How do you avoid lifestyle creep? 

Rewards keep us motivated to put in the work needed to continue to pursue our goals. Therefore, allocating a portion of that increase to satisfy your current needs or wants, will increase the chances of you not falling prey to lifestyle creep. 

1. Create a financial plan before you receive the pay increase or receive the settlement. A simple plan would be to use the 50/30/20 rule, which will see 50% going towards needs, 30% going to wants and 20% going to savings. If you already have another budget allocation you use, then continue to use that formula. 
2. Set or revisit your overall long-term financial goals, as the desire to increase your spending should be controlled by these targets. By keeping those goals at the forefront, you will be less likely to fall into the trap of consumerism, spending on products and services that you do not need. But, you will continue to pursue the long-term strategy, investing monies into money earning activities. Always keep in mind that these investments will bear fruit in the future to allow you to live the lifestyle you desire. 
3. Understand your money habits. If you are struggling with controlling the urge to spend indiscriminately, then seek to understand the reasoning behind your spending. Are you spending on all the items you did not have as a child or are you spending to prove to your peers that you have achieved? Whatever the answer is, you will need to do the mental work to overcome the spending desire as it will derail your overall financial goals. 

An improvement of your financial position should be viewed as positive, and should not cause distress or be a disruption to your ultimate financial goals.