Unmasking Lifestyle Inflation: An Insightful Guide to Identify and Steer Clear of It

PERSONAL FINANCE
Understanding Lifestyle Creep and How to Stay Clear
By Hal Kitzmiller
Last Updated: February 23, 2023

Ever wonder why the more money you make, the harder it becomes to save? You’re not alone. This sneaky financial drain is called “lifestyle creep,” and it’s all too common. But don’t worry – there are ways to recognize and dodge this money trap.

So, what’s Lifestyle Creep?
“Lifestyle creep” (or “lifestyle inflation”) is when your spending keeps up or surpasses, your income increases. It usually happens stealthily over time.

Say you start earning $50,000 per year. You drive a modest car and live in a small apartment. As your career progresses, your income grows. But, rather than saving the extra bucks, you find more ways to spend it. When you’re earning $70,000, you’re driving a swankier car, living in a larger home, dining out more, and taking more vacations. Suddenly, your expenses have risen as much as your income. You’re not financially better off than you were when you made $20,000 less. Basically, lifestyle creep is buying more stuff as you earn more money.

Is Lifestyle Creep bad?
Lifestyle creep has some nasty side effects. First, it can stop you from saving for the future because you’re too busy enjoying your earnings now. Next, it can lure you into debt. It’s hard to resist credit cards and loans with a bountiful income, but those debts can quickly add up.

Fancier lifestyle choices often come with hidden costs. So, you moved to a bigger house? Did you consider the larger utility bills, insurance costs, and upkeep and gardening expenses?

A significant issue with lifestyle creep is that it makes downgrading tough. If your income drops suddenly due to job loss or a pay cut, you might find it hard to cover your new lifestyle costs, which can lead to financial distress and a spoiled credit rating.

Signs you might be in the grip of Lifestyle Creep
Here are some red flags:
– You’re living paycheck to paycheck: despite earning more.
– Regularly spending more than you earn: relying on credit cards for essentials or borrowing to fund purchases.
– No savings: No emergency fund for unexpected costs because you’re using it all on daily expenses.
– Rising debt: Extra cash is used to maintain your lifestyle rather than reduce your debt.
– Money stress: If worrying about finances is your new normal, that could be a sign.

How to avoid Lifestyle Creep
1. Determine your financial goals: Whether you plan to retire early, save for a home, or just build an emergency fund, knowing your financial goals keeps you from spending blindly.
2. Track your expenses and set a budget: Know where every penny is going. Use a mobile app or just a piece of paper to keep an eye on what you’re spending.
3. Live below your means: This means spending less than you earn and setting money aside for the future.
4. Stay away from debt: Pay off present debts and avoid future ones. Charge only what you can pay off each month to your credit card and avoid unnecessary loans.
5. Smartly handle pay raises: A raise is undeniably thrilling, but remember to put aside some towards savings.
6. Automate your savings: Regularly and automatically, transfer funds from your checking account to your savings account.
7. Avoid comparing yourself to others: Just because your colleagues or friends can afford something doesn’t mean you should too. Focus on what’s best for you and your family.

Final Thoughts
Evading lifestyle creep might be a challenge, but with a bit of vigilance and a commitment to saving, you can nip it in the bud, or even reverse it. Stay mindful of your spending habits, and you’ll be on track to achieving financial independence in no time.