What is Lifestyle Creep + 4 Ways to Avoid it

By Cynthia Meyer CFA®, CFP®, Chfc®

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What would you do if you got a big raise or bump in income? Would you get a bigger place? Lease the car of your dreams? Buy extravagant holiday gifts for your family? If you think like an investor you would be likely to save and invest most of your increase. That doesn't mean you would never treat yourself, but it does mean that you look at your income as a tool for building assets -- not just for enjoying life now.

What Is Lifestyle Creep?

"Lifestyle creep" means that as your income rises, your spending on current expenses rises. We've all been tempted to spend more as our income increases. For most people, it happens gradually, over long periods of time. 

For example, when I was a young professional (before I got my financial act together), every time I got a raise or extra income from my side hustle, I improved my housing situation. I went from sharing a house, to sharing a two bedroom apartment, to my own studio, then my own one bedroom, then a two bedroom penthouse! I lived in very expensive areas (DC and SF Bay area) and consistently spent 40% of my income for rent and utilities. 

At the same time, I didn't have much of an emergency fund or retirement savings, and I still had student loans. I wanted to buy a home, but I had not yet connected the dots between my lifestyle creep and my lack of progress towards my goals. I was earning more, but I wasn't saving more. Now I look back at those decisions with regret about my missed opportunity to buy my own place in my twenties instead of spending it all on rent.

Four Ways to Avoid Lifestyle Creep 

If you’ve fallen victim to lifestyle creep, you’re not alone. Here are four ways to turn it around:

Way #1: Compare Your Personal Inflation Rate to the CPI

One effective way to figure out if you’ve succumbed to lifestyle creep is to figure out your personal inflation rate and compare it to the Consumer Price Index (CPI), which is the inflation rate set by the government. According to the Bureau of Labor Statistics, inflation has been increasing between one and two percent per year.

Take a look at your spending from last year. Say, for example, that you spent around $60,000 last year, and this year you spent around $65,000. Your personal inflation rate from last year would be 9.2 percent. If the inflation rate from last September to this September was 1.5 percent, we can easily see your spending is well beyond simple inflation adjustments. That’s a pretty big sign that you’ve experienced lifestyle creep.

Way #2: Make a Budget

The big thing to understand about lifestyle creep is that it’s different for everyone. It's all relative to how much you make versus how much you keep. If you’re increasing your spending significantly but still putting a sufficient amount away towards your savings and retirement, then you aren’t outspending your earnings. As our income increased, my husband I bought a bigger house, but we still saved a bigger percentage of our earnings.

Combat lifestyle creep with a budget or spending plan. Track your spending for a few months and set goals for how much you'll save and spend. Asset builders -- the "Millionaire Next Door" types -- save A LOT more than the average person, typically 25 to 30% of their earnings. If saving that much is unrealistic right now, set a goal to increase your savings rate 1-2% every year until you hit your target percentage.

Way #3: Plan For Your Next Promotion

Seeing your paycheck increase significantly after a promotion or salary increase is exciting and exhilarating. But if you go into a significant salary increase without a plan, that extra cash could start burning a hole in your bank account. Before temptation strikes, decide what percentage of your increase you’ll be putting directly into savings and how much you’ll be leaving as new discretionary income. Move forward with your plan as soon as the increase goes into effect, making the transfer into savings automatic if possible. This way, you won’t even have to decide month after month whether to save or spend.

Way #4:Treat yourself wisely

You work hard for promotions and salary increases, and you should get to reap the reward of your efforts. Don’t try to deprive yourself completely when you receive a pay increase, especially when you’re creating a new budget that’s adjusted for your new salary. Give yourself a little wiggle room to spend, and practice spending with intention.

Lifestyle creep can occur so effortlessly that you don’t even know you’ve experienced it until you look back and assess your previous spending. And while receiving more money month-after-month is exciting, the key is to focus on saving what you need to for retirement, college and other large financial goals like real estate investing or starting a business.

The bottom line: lifestyle creep can get in the way of achieving your financial goals if you don't make spending plan.

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