By Jared Paul, CFP, CIMA
Lifestyle creep is the phenomenon of spending more money once you begin to make more. Although it may not sound like a problem, falling victim to lifestyle creep can have short or long-term financial consequences.
Unfortunately, this cycle can go on forever. To better understand the concept, let's review a few examples of lifestyle creep and learn how to avoid letting it happen to you.
The Average Consumer
On a small scale, lifestyle creep can impact the average person. A recent conversation with my brother proved this. He has been doing well with his career and earning more money lately, and bought tickets for both his wife and self to the MLB playoff's game in an expensive viewing area.
It's reasonable to enjoy more lavish experiences as your salary increases. But if doing so impacts you to the point where you're not saving more of your money and your personal financial situation is not improving, then you are falling victim to lifestyle creep.
A Big Time Investor
ABC's 20/20 reported a segment in 2009 after the stock market crash about a big-time investor who owned a hedge fund and made upward of $750,000 per year. When the recession hit, things went south in a hurry.
At the time of the news report, they were following him around while he was delivering pizzas in order to make money to support his family. He was making close to $750,000 each year, and because he didn’t properly save he was forced to deliver pizzas. This should not be the situation he is in.
During the segment, he fully admitted that it was his fault for not planning ahead. His family lived a lavish lifestyle, filled with expensive vacations, a 4,000-square foot home on a golf course, and much more. As he earned more, the family spent it with ease. At the time of taping of the segment, the family had no savings and was facing foreclosure on their home.
You may also be familiar with the slew of statistics showing bankruptcy rates of former professional athletes. According to a study conducted by Sports Illustrated in 2009, “By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce. Within five years of retirement, an estimated 60% of former NBA players are broke.”
Even though these are individuals who are making millions of dollars throughout their careers as professional athletes, the moment the paychecks stop coming in, many begin a downward spiral toward financial ruin. The reasons that this can happen are numerous, but it boils down to the athletes spending much more than they have to and burning through their money on unnecessary luxuries - fancy cars, jewelry, a big house and more.
The Downside of Altruism
It’s not only frivolous spending that can contribute to lifestyle creep. Many individuals spend the money for more altruistic reasons. They want to help out their friends and family, so they find themselves adding more and more expenses on to their monthly budgets.
I’ve heard of some athletes paying for 20 or more people’s phone bills, mortgages, car payments, etc. This is very kind of them, but it obviously is not sustainable. It’s a very worthy cause to help those around you, but if you don’t take care of your own financial wellbeing, eventually the money runs out and everyone loses.
The analogy I like to use is the instructions you receive when flying. Flight attendants tell you that in the event of oxygen masks being deployed, you should put yours on first before helping those around you. The reason for this is if you try to help those around you before putting your own mask on, you’ll eventually run out of air and faint. If people are relying on you for assistance, you won’t be much good to them unconscious.
The same logic can be used in your finances. If you want to help friends and family, you need to first get your own finances in order. If not, eventually you will find yourself in hardship and will no longer be able to help the ones you love and care about.
Fighting Off Lifestyle Creep
As you go through your career, you are bound to get promotions and increases in pay. At each one of these positive moments you will find yourself in a position to afford more luxuries than before. The struggle is to find ways to avoid growing accustomed to those unnecessary luxuries, and use the additional income to build true wealth. One way to do this is to decide how much additional income you will put towards savings (as opposed to spending) before you start to receive it.
For example, let’s say you are making $100,000, and you find out you are getting a promotion. With this new promotion, your salary is getting bumped up to $110,000. Before you start receiving the new increase in pay, decide how much of this additional income you want to put toward savings and investing for the future. You might find that you can put it all toward savings and investing if you’ve been living comfortably on your current salary. You don't have to change just because you’re making more money.
Humans are great at adapting and lifestyle creep is just another example of this. Instead of getting accustomed to a higher level of spending, maybe it would be better to save the additional income and acclimate to a higher level of saving, helping you build true wealth.
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This article was originally published on Investopedia.