How “Lifestyle Creep” can derail your financial goals

First of all, who coined this truly awful phrase? I mean, “Lifestyle Creep”. Why not just call it “hey you in the bushes”. I’m guessing it was the marketing department of some insurance company trying to make overspending sound more insidious to frighten people into investing more in their policies. Whatever happened to the good old phrase “living outside your means”?

Lifestyle Creep – in fact, I’m calling it “Lifestyle Inflation” from here on out – refers to the gradual increase in spending as people earn more money. As you earn more, you tend to increase your expenses accordingly. Things that used to be luxuries become necessities. Inevitably, this leads to an inflated lifestyle that you may not be able to maintain.

While it may feel justified – “hey, I’ve earned this! Now I earn more I can afford more little luxuries” – if left unchecked, this phenomenon can have serious consequences, such as derailing your financial goals. Let’s unpack this.

Why is it bad?

Lifestyle Inflation tends to happen gradually, without people even realising it.

Initially, you start earning more money. For example, when you change job and get a pay bump. You might decide to splurge on a few things you’ve been wanting for a while, as a treat. Maybe you upgrade the car or take a more expensive vacation.

These small indulgences give us that all-powerful dopamine hit. Gradually, they stop becoming “little treats” and start becoming the lifestyle we’re accustomed to. It can then be hard then to rev back spending when it’s necessary.

By spending more money as you earn more, you end up living month to month. Even though you are earning a higher salary, your financial position is not improving. In fact, it’s getting worse as you have an ever-inflating lifestyle cost that you will want to maintain when you’re ready to retire.

This also brings the danger that if you lose your job or face an unexpected expense, you may end having to get into short-term debt needlessly.

How to resist Lifestyle Creep Inflation

The best way to combat this “phenomenon” (somewhat hyperbolic as the term itself) is to have a financial plan in place.

Any decent financial planner will help you set up the correct structures to make managing your finances less complex. It’s not all about having a budget and sticking rigidly to it – you need to be able to live your life, after all.

It’s more about being conscious about your money. If you are spending money, you should feel confident that you are supposed to and can afford to spend that money. It’s a simple concept, although less exciting than an overspending lifestyle.

Here are a few simple steps that will help you be more conscious about your money:

• Use one current account. If you are a married couple, use a joint current account and run all of your income and all of your expenses through this one account. After three months you will have almost perfect clarity about what you are spending. You will then know roughly each month what you need to fund your lifestyle.
 

• Have one savings account. Automate your monthly savings into this account two days after you get paid. Effectively you are paying yourself first. Do not wait until the end of the month to save – you will spend the money! Treat it like a non-negotiable bill.
 

• Clear high-interest short-term debt as a priority.
 

• Change all of your direct debits, bills, loans repayments to within two days after you get paid (works best if you are paid monthly). The sooner it leaves your account, the better, and you have a more accurate idea of what’s left over.

Preventing it in the future

Once all the savings and bills are taken care of at the very start of the month, you can spend the rest without anxiety or fear over whether you can afford to or not. You also now know exactly what your expenses are, so you can work on building a savings account with six months’ worth of expenses, for emergencies.

Once your savings account has enough to cover six months’ expenses, you no longer need to build money in cash (assuming you have no short-term expenses you are saving for, such as a house deposit or new car). You can then start considering investing this money – again, automate this.

You now know what your monthly lifestyle cost is. When you change job or get a promotion at work, resist the urge to treat it as extra spending money. You’re already accustomed to spending a certain amount. You can put the extra to far better use.

Talk to your employer about putting future salary increases directly into your pension and start increasing your own personal contributions gradually over time as well. You could also increase the amount you put into investments, if this is right for your financial goals.

Your financial planner will be able to advise you on the best way to handle your money in the event of a pay rise.

What next?

This stuff is so simple everyone should be doing it.

This is the kind of stuff that should be on the Leaving Cert syllabus (Norma Foley, I hope you’re listening!). Be mindful of your spending. Put the correct structures in place. Automate your savings and spending as much as possible. Then start focusing on your long-term goals.

If you’d like to discuss your situation and ways to avoid “Lifestyle Creep”, please don’t hesitate to give us a call on 01 908 1500 or email us at info@metisireland.ie.
 
 

Cian Callaghan
Private Client Manager