Lifestyle creep is what keeps high income earners living pay check to pay check, unable to step out of the rat race and always feeling like they never have enough money.
Instead of buying freedom, impressive salaries often increase a feeling of being trapped and always wanting more.
Lifestyle creep or lifestyle inflation is when we increase our cost of living as our income increases such that we continue living our lives pay check to pay check with no significant savings. Our salaries and income continually increase, yet we find new ways to spend it leaving nothing left over.
The lifestyle inflation cycle goes something like this:
The creep is one of the big reasons why many high income earners struggle to retire, are constantly in debt, have no savings and are entirely reliant on their salary.
When we're young our first job probably doesn't pay very much but we make it work because our cost of living is still quite low. After all, just a few months earlier we were still in university or school, living off of pocket money, part time jobs and beer.
Now that we have that first job, we probably have more money coming into our account each month than we've ever had before.
So in celebration of no longer needing to live like a student we buy better food, shop at nicer stores, buy a car (or a nicer car if we already had one) and buy a house or apartment. This initial increase in our living expenses is to be expected when we enter the adult world.
Once we've paid for everything each month we probably don't have much money left, but that's ok because early in our career it takes time to go from near zero expenses to living a comfortable adult life. Eventually we get to a point where we're living comfortably, can afford everything we need and have a happy, full life.
Here's where it all typically goes off the rails. Instead of acknowledging our happiness and contentment in life by saving the money from future salary increases, we find ways to spend it and increase our cost of living.
Instead of seeing a salary bump as a chance to increase our investments and create passive income streams, we find new things to buy so that before we know it our entire salary is consumed every month.
This is the dreaded lifestyle creep in action. Over time, we find ourselves earning impressively high salaries yet we still walk a tight rope each month trying to ensure we have enough money for everything.
Of course getting a salary increase is great and it's fair to want to celebrate. It's natural to want to enjoy the fruits of our labour. As we get older, we develop new interests and our lifestyle changes. Using our income to fund a life we love is what it's all about.
Buying something nice to reap the rewards of working hard for an increase in income is one thing. However when we find ourselves inflating our lifestyle to match our new salary, we end up with more stuff and less freedom. We remain slaves to our salary no matter how much we earn.
Be careful of allowing what was once a luxury to become a necessity
This is why Financial independence is so important. It's about having enough savings or passive income to own our time and choose how we spend it. It's about ensuring that we're not slaves to a salary but instead choose to work (or not) because we love it.
If we don't keep lifestyle creep in check, not only will we never reach financial independence, we'll likely never be able to retire and will live our lives in debt, paying back loans for things we arguably don't need and always wanting more.
I try to avoid the creep by identifying what I really value in life. What brings long term happiness. Generally speaking, I've got enough "stuff" . Buying a new phone, a new pair of shoes or the latest widget is generally not a long term bringer of happiness and fulfilment.
For me, long term happiness comes from owning my time and all the benefits that come as a result. More time with family, freedom to explore any side project or business idea that interests me, having no debt, travelling and answering to no one.
Think about what brings real happiness and fulfilment for you. Keep that goal in mind next time you get a salary increase so that you can invest that money towards it.
Another way I avoid the creep is to increase my monthly investment contributions every time I get a salary bump. I never sit with more than a couple hundred dollars in my bank account. I know how much I need to spend on groceries, insurance and general expenses each month while everything else is automatically invested.
Avoiding lifestyle creep for me isn't about scrimping and not enjoying life as my income increases. Completely the opposite in fact. It's about identifying what I value in life so that I spend intentionally as opposed to just buying more "stuff" simply because I happen to have some extra money lying around.
Keeping the bigger picture in mind keeps me on track with my investments, avoiding lifestyle inflation and on track to financial freedom.
What's your experience been like with lifestyle inflation? Any tips on avoiding it while continuing to enjoy life's journey? Let me know in the comments or reach out via email or twitter. I would love to hear from you.
Article by Brendon @ Money FI