How ‘lifestyle creep’ can erode savings and investments
Lifestyle creep can leave even extremely high earners struggling with debt, saving for retirement, or meeting other financial goals and obligations.
Also known as ‘lifestyle inflation’, this is a phenomenon defined as an ‘increase in spending when a person’s income goes up’. This subtle but insidious trend can be detrimental to one's long-term financial health, and its effects are far reaching.
In this article, we'll delve into the intricacies of lifestyle creep, exploring its root causes, consequences, and how to combat it to secure a more stable financial future.
How it happens
At a first glance, an increase in income should be a cause for celebration. It often means a promotion, a better job, or a successful investment. However, the allure of lifestyle creep begins when people start to adjust their spending habits to match their newfound wealth.
Suddenly, a better salary means a bigger house, a more expensive car, or dining out more frequently.
Several factors contribute to the prevalence of lifestyle creep:
Societal pressure: Society often associates success with visible signs of wealth. This pressure leads many to believe they should be living a more lavish lifestyle as their income increases.
Peer influence: Friends and acquaintances who upgrade their lifestyles can subtly pressure others to do the same to maintain a sense of belonging or social standing.
Marketing and advertising: Constant exposure to advertising, both traditional and digital, convinces individuals to desire and acquire more, perpetuating the cycle of consumerism.
Lack of financial understanding: Many people don’t know how to manage their increasing income effectively, leading to reckless spending habits.
What are the consequences?
Reduced savings: As spending increases, there is less money available for saving or investing, leaving people vulnerable to financial shocks.
Minimal investments: With less disposable income, opportunities for investments are missed, depriving individuals of the potential for long-term wealth accumulation.
Debt accumulation: An inflated lifestyle often means taking on more debt to sustain it. This can lead to credit card debt, mortgages, and loans, creating a cycle that is hard to break.
Stress and anxiety: Constantly striving to maintain a high-cost lifestyle can lead to stress and anxiety, impacting both mental and physical wellbeing.
How to combat lifestyle creep
Create a budget: Establish a detailed budget that outlines your financial goals and limits your spending in each category. Stick to this budget religiously to avoid unnecessary expenses.
Save automatically: Set up automatic transfers to your savings and investment accounts as soon as you receive your salary payment. This ensures you prioritise saving before spending.
Delay gratification: Before making any major purchases, give yourself time to think it over. Delayed gratification can help you make more deliberate spending choices.
Increase investments with each pay raise: Commit to allocating a portion of every pay raise directly into your investments or savings. This helps you balance lifestyle improvements with long-term financial security.
Regularly review finances: Periodically assess your financial situation, track your spending, and adjust your budget accordingly. This practice can help you identify and rectify lifestyle creep before it gets out of hand.
By recognising the root causes of lifestyle creep and taking proactive steps to combat it, it’s possible to regain control of your finances, secure your future, and avoid the pitfalls of living beyond your means.
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