One does not have to search too far to realize the complications that come with money—having, or having none of it—having too much or too little of it. How to get it, keep it, use it or share it. It seems that there is no end to the problems you will have once money is in the picture. If asked to choose the biggest problem associated with money, many would say it is debt, or loss of income or investment revenue owing to a disaster, illness or fraud.
Each of these answers seems to point to the idea that one can never have enough of it. After all, it has been said many times, the more the money, the more the problems. However, I think that the most problematic thing about money is the human tendency to ‘level up’ with every increase in income. This idea is known as: “Lifestyle creep”. Lifestyle creep refers to the phenomenon where discretionary consumption increases on non-essential items as the standard of living improves. With lifestyle creep, luxury goods and discretionary spending become perceived as a right to have and not a choice [a necessity versus a want].
Each of these answers seems to point to the idea that one can never have enough of it. After all, it has been said many times, the more the money, the more the problems. However, I think that the most problematic thing about money is the human tendency to ‘level up’ with every increase in income. This idea is known as: “Lifestyle creep”. Lifestyle creep refers to the phenomenon where discretionary consumption increases on non-essential items as the standard of living improves. With lifestyle creep, luxury goods and discretionary spending become perceived as a right to have and not a choice [a necessity versus a want].
Two things bring on lifestyle creep. The first is the conscious decision to make one’s life more luxurious as income increases. For example, trading in an old car for a new one, getting a second home, eating out more often, or hosting many parties. The second reason is inflation. Because with it comes an increase in expenses and an increase in one’s earnings might not always accompany these.
The major downside of lifestyle creep is that when income decreases, for instance, with unemployment or in retirement, people will quickly run out of whatever savings they have as they continue to live above their means. They do so because they have become accustomed to a particular way of life and cannot imagine anything different anymore. Retirement plans may get derailed because the person has not been able to save as much as they need to in the course of their careers.
The major downside of lifestyle creep is that when income decreases, for instance, with unemployment or in retirement, people will quickly run out of whatever savings they have as they continue to live above their means. They do so because they have become accustomed to a particular way of life and cannot imagine anything different anymore. Retirement plans may get derailed because the person has not been able to save as much as they need to in the course of their careers.
One could also postpone retirement if they have not cleared themselves of debt, as it does not make any sense to carry the burden of debt into retirement. And usually, the size of the debt in these situations is unnecessarily large. The people most likely to fall victim to lifestyle creep fall into two categories:
1. The individuals approaching retirement. They are in their peak earning years and have probably paid off most, if not all the debt they had incurred in their earlier years. The temptation is to overspend. However, they also are almost about to retire and need to make sure that their finances are secure.
2. Young professionals who just started earning a sizable and regular income. They may get carried away with their newfound Financial Independence.
Now I am certainly not saying that people should remain in uncomfortable situations. Everyone is entitled to live with dignity and should seek to improve their quality of life. I am merely suggesting that with increased income; the priority should be to increase savings and investments before increasing spending.
One sure way one can reverse the effects of lifestyle creep or avoid it altogether is by having a Financial Plan. Do not make any financial decisions without having a financial plan. This plan should make it possible for you to hold onto more money than you spend. It should consider your financial goals, both the short- and long-term goals, and the strategy you have to attain them. Your financial plan needs to consider a couple of things for it to prove effective.
i. You must Pay yourself first. You can go about this by making additional contributions to your emergency and retirement fund before anything else. Increase these margins with every increase in income, instead of merely retaining the previous rates.
ii. Reward yourself wisely; some people call this creating a fun fund. Just like I had said before, I do not mean to suggest that you cannot spend on anything you enjoy. It is normal to want to treat yourself for all your hard work. The trick is to do it strategically. It is essential to give yourself some wiggle room and freedom within your budget, so you do not feel deprived. This will significantly curb the urge to binge.
iii. Automate your finances as much as you can. I know I have said this before, but I mention it again because it is easy to get cocky and decide that your willpower will be enough to keep you committed to your financial obligations.
Set up a process to automatically transfer money from your checking account into a savings or investment account regularly. With just a one-time setup, you’ve committed your future self to save money consistently. Thanks to automation, you can force yourself to save money, and you don’t even have to think about it. You just set it and forget it. As your income grows, you can automate your savings and investments to grow along with it.
All of these suggestions can certainly help you get ahead of this money problem that is lifestyle creep. But perhaps, I will leave with you a more radical idea I came across. “If you get a 5% raise in your income, go back home and create a new budget for an income with a 5% reduction”. Then, invest all the new surplus income. This certainly will make it impossible to fall victim to this idea of “levelling up”.
All of these suggestions can certainly help you get ahead of this money problem that is lifestyle creep. But perhaps, I will leave with you a more radical idea I came across. “If you get a 5% raise in your income, go back home and create a new budget for an income with a 5% reduction”. Then, invest all the new surplus income. This certainly will make it impossible to fall victim to this idea of “levelling up”.
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