Be wary of lifestyle creep

The more money you make, the more money you spend. That may seem perfectly sensible, but what if you spend all of the extra money you make? Now you’ve enhanced your lifestyle, but you’re no further ahead in achieving your financial goals.

Lifestyle creep, also called lifestyle inflation, begins slowly. Perhaps you get a raise and start going to upscale restaurants or purchasing expensive concert tickets. What were once wants now become needs, and smaller indulgences then lead to an expensive car and ski trips abroad.

Elevating your lifestyle when your income increases is normal and expected. Lifestyle creep is only a potential danger when you extend yourself beyond your means.

When you’re susceptible

People can be prone to lifestyle creep at any age, but here are two stages of life when the consequences may be more severe.

Older Gen Zs and younger millennials. In your late 20s or early 30s, you may be able to afford many of the items and experiences on your wish list, but what if all of your income only covers your purchases and cost of living? You can pay the price for lifestyle creep in two ways. First, by not putting enough away, you can fall behind in achieving short-term goals, such as contributing toward the down payment on your first home. Second, with regards to the long-term goal of funding retirement, you miss out on the opportunity to benefit from decades of compound growth.

Approaching retirement. Gen Xers and younger boomers within about 10 years of retirement may have a new level of discretionary income, especially once their children have launched and their mortgage is paid off. They should feel free to use these funds to enjoy life, but they may create an undesirable future if country club memberships and European vacations come at the expense of saving for the future. What if they can no longer sustain this standard of living when retirement arrives? 

Curbing lifestyle creep

Awareness is key to avoiding this financial hazard, as lifestyle creep can sneak up on you. Are you making more money but still in the same financial position as before? Are you taking on debt to support your enhanced lifestyle and becoming worse off financially?

An easy and certain way to manage or prevent lifestyle creep is to increase the amount you regularly save and invest whenever your income increases—before you use the extra funds to enhance your lifestyle.