How to Avoid Lifestyle Creep and Save a Fortune

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Have you ever heard of lifestyle creep? If not, maybe you have heard of keeping up with the Joneses. It is all about spending more money than you need to and consuming just because you can. The more we earn the more we spend. It is something that is programmed into us as we grow up, it is what we work for and aspire to. Problem is that nobody tells you that it can rob you of an early retirement and financial freedom. If you can avoid lifestyle creep you can save a fortune.

What is lifestyle keep?

So, what is lifestyle creep and how is it programmed into us? As you become an adult you are expected to choose a career. That career should provide for you and bring success. Successful means that you progress through that career and earn more money. We need to earn more so that we can have a better life. That better life means affording more expensive cars, bigger houses, sending our kids to good schools, overseas travel and all the toys that will make us happy. This is the good life that we all aspire to. Right?

As you start working an entry level job you work hard to get promotions and raises to move up the ladder. Even if you start a business you work hard to get it going and to be successful. As we achieve this success we feel the need to reward ourselves. Nothing wrong with that if it is a reasonable reward, right? But instead we feel that we must spend all that additional money and sometimes a bit more to show our success.

It is important that people see our success and that we take our rightful place in society. We think that our friends and the people we look up to have done this and it is working for them. There is a never-ending improvement in lifestyle. New cars are always nicer and better than the last models. We always seem to outgrow our houses and there are new developments and cooler places to live.

How do you identify it?

Think back to when you were a student or when you just started your first proper job, or you were a newly married couple. As a student I lived at home and caught a train to university. For a while I lived in a dorm room and walked and cycled to class. When I started working, I lived in a small 2 bed townhouse and caught the bus to work.

The first thing I did after getting a new job was buy a new car. The second thing we did was buy a bigger house. The first thing I did after my first promotion was buy a better car. The next thing we did was put in a pool and do house alterations.

The success that we seek is closely linked to lifestyle improvement. That is the motivator of the success. You could say that the only reason we work harder is to earn more so that we can spend more to improve our lifestyle. If you take a step back and think about it, it is easy to identify. But in day to day life it creeps up on you without you seeing it. That is why it is called lifestyle creep because it is not so easy to see.

Be conscious set limits

You must make a conscious effort and think about your life. Think about what you are earning and how you are spending this money. Think about how this has changed from your first paycheck. You will have earned more over time, but you will have found new ways to spend that money.

If you are like me, you will be thinking that you need to spend this money and you need to earn more to be able to live the life that you want. The longer I experienced this the more I realised that I could never earn enough. There is no limit to how much money you can spend and how much you can improve your lifestyle.

You must set that limit for yourself. That limit is a combination of living with reasonable comfort and having enough money to maintain a significant savings ratio for your future.

How can you avoid it?

Your salary will increase during your working career as you get annual increases and promotions. To avoid lifestyle creep, you need to save and invest these additional increases that you get.

Most of the time you are already living comfortably. Spending more on your lifestyle is largely a luxury. There are two benefits doing this. Firstly, you keep your cost of living lower and secondly you obviously increase your savings rate. 

I have a real-life example of this as I have experienced and lived through this lifestyle creep. I was able to keep a record of my salaries for the first 20 years of my working life from 1995 to 2015.

The Lifestyle Creep Gap

For the first 20 years of my working career my salary increased with a compound annual growth rate of 16%. In that same time the inflation compound annual growth rate was only 6%. So, there was a 10% difference. That difference was the lifestyle creep gap.

In 2015 I had my financial freedom realisations. I found myself sitting in a pile of debt and effectively a net worth of zero. I had worked for 20 years and was earning a decent salary. I was living a good life, yet I had no wealth and no idea about financial freedom.

Look at the graph below where I have plotted the inflation increase vs the increase in my salary. That large blue mountain is the additional money that I was earning over and above the increase in inflation. All that money was being spent on lifestyle while it should have been invested.

The story of my salary over 20 years

If I had invested just half of that difference in the stock market, I would have R 6.9M in investments. Had I invested the full difference it would have been double that. That money together with my pension fund portion would have meant that I could have been financially free right now.

Why does it make such a difference?

The reason that this is so important is that you can automatically increase your savings rate. It means that you can save this extra money without sacrificing and cutting your expenses. You don’t have to sacrifice and downgrade your lifestyle. You just have to resist unnecessary improvements. All you must do is save and invest at least some or ideally all the additional money that you get.

If you already have a high savings rate, then you can afford to increase your lifestyle cost. But if you have a very small savings rate then you need to use this extra money to increase your savings rate. If you fail to do this then you will just continue to increase your lifestyle cost. At some point you will realise that you are not investing enough for retirement or even worse you are spending more than you earn. By then you will be used to the lifestyle and any changes will mean making big sacrifices and going backwards.

You need to start using this lifestyle creep gap early in your life. Then you will benefit from the compounding effect. Making those early investments and continually increasing your savings rate will get you to savings rate of 50% and above.

To be able to do this you have to accept that your salary is not just there for your lifestyle and to have a good life. It is also there for you to be able to save and invest for the future. Not just for retirement but to enable you to reach financial freedom and have a life with more choices and options.

Golden rules to avoid lifestyle creep

The first golden rule how to avoid lifestyle creep is the most important and guaranteed to work. Every time you get an increase or a bonus invest at least 50%. Make this a standard rule and follow it religiously throughout your life.

The second golden rule is to live by your own rules and not by somebody else’s. That means that you decide what you want and is good for you.

Don’t worry about what other people are doing or saying. Don’t worry about what they have, and you don’t have. Don’t worry about where they go and what they do and what you don’t do. Don’t compare yourself to others and try and keep up with them.

Look for ways to improve but don’t follow just to be the same or be “in”. This is exactly how you land up with lifestyle creep. If you can avoid lifestyle creep you will be well on your way to building wealth.