A word to the wise:
It is quite common for people who earn more to spend more. The issue is when people living a paycheck to paycheck lifestyle begin to scale their lifestyle along with their increased income to quickly. The more income they earn, the more money they spend. This is called Lifestyle Creep. Instead of attempting to earn more money than they spend, they often spend what they earn or spend more than they earn. Aim to increase your wealth, not increase your possessions.
In the past 2 weeks, I’ve had 2 separate conversations with friends that shocked me. Not only did they shock me, but the conversations reinforced my dedication to this blog and spreading ideas for better personal finances.
A long-time friend of mine and I caught up with each other over a beer after not seeing each other for a few months.
Here is a little comparison of our life situations. Neither are better or worse, they are just different:
- I currently live in a small city, he lives in a major city.
- Make a fairly good income for someone my age, he makes double what I make.
- I graduated in 2016, he graduated in 2014.
- We both graduated with debt.
Let me start by saying I am quite proud of him and his accomplishments. He didn’t start with much, but has increased his living conditions considerably through the years. He is also a very hard worker, which is why he makes so much money!
What shocked me was that he is struggling to reach his goals. He still has debt and he is struggling to save up enough for a down deposit on a new home.
When I first heard this, I immediately thought of what I could do with double my current pay. My debt would be totally gone after a few months, I would have a fair amount of cash saved and some money invested.
Here’s the kicker…his monthly expenses are more than double mine.
Lifestyle creep is something a lot of people do not consider. They earn more money, so they spend more money. It is the consumer type lifestyle that can quickly land you in a bad position.
“If I’m making more money, I want better things!”
I totally agree. With higher net worth, you should be able to have a more luxurious vacation, you should feel financially safe and secure, and you should be able to enjoy the fruits of your labour.
That being said, why would you want to continue living paycheck to paycheck?
Lifestyle creep is essentially when someone gets a raise, they purchase bigger and better things. With the additional income they generate, they immediately begin spending. Instead of increasing their net worth, they actively keep themselves from becoming wealthier. They are rich in possession but not rich in currency.
- When an employer gives an employee a bonus, they buy a new TV rather than invest the money.
- They get a raise, they purchase a more expensive car with the additional money they have.
- When they get another raise, they get a nicer apartment to impress their friends and family with their new success.
The more they earn, the more they buy.
Let’s assume John Doe has $30,000 in debt. He currently makes $40,000 per year, he has a decent apartment, a car he owns, and he is able to make monthly payments of $300 per month on his debt.
By the end of the year he is able to pay off $3,600 of his debt. If he sticks with this payment plan, it will take him approximately 9 years to pay off his debt.
John Doe ends up getting a huge promotion at work! He now earns $80,000 per year! He is so excited that he finally gets a new car. Not only that, he and his girlfriend get a new apartment in the city. Finally, he is able to increase his monthly debt payments to $500 per month.
By the end of the year, he will have paid off $6,000 from his debt. It will take him roughly 5 years to pay of his debt. That cut off 4 years of his debt!
This is an example of lifestyle creep. You could argue that he is paying down his debt faster and he has a nicer place to live and a sweet new car. And you aren’t wrong.
But let me give you an example of what would happen if he had not let himself get sucked into the lifestyle creep of his big new promotion:
The more they earn, the greater their net worth becomes.
Instead, after receiving his huge promotion, John Doe revised his budget. With this new budget he wouldn’t need to be so frugal with his groceries and could get some new clothes. Not only that, he could pay approximately $2000 a month towards his debt, while still having a little bit of money left to save up and invest!
In only 16 months, John would be entirely debt free.
Of course, he realized that he would have to continue driving his currently car for another few years, but he is used to it. And instead of renting a more expensive apartment, he can start saving for a new home once his debt was paid off!
The second conversation worth discussing was not necessarily lifestyle creep, but I believe it can be lumped into the same category.
While out with a group of friends for dinner, we were having an extremely important discussion. We were discussing how much money we would need to eat a spider. Yes, you read that correctly.
The answers ranged from $100 to absolutely not!
As a middle ground, one of us proposed that $10,000 would be a good amount because $10,000 could be life changing. I nodded my agreement and so did a few others. Two of our friends loudly disagreed and said that $10,000 is not life changing money and they wouldn’t do it.
I can totally understand why they wouldn’t want to eat a spider. Unfortunately, I could not wrap my head around how someone wouldn’t think $10,000 dollars could be life changing. In the end, this turned into the next big debate of the evening.
Why the difference of opinion?
The only thing I could think of was that each of us have our own circumstances and perspective. The reason I think this tie into lifestyle creep is because someone with the mentality of lifestyle creep would not think anything of $10,000 dollars in the long run. However, for someone who avoids lifestyle creep, they are able to see the opportunity and possibilities that come along with that $10,000 dollars.
How can $10,000 dollars be life changing?
- Pay off debt
- Pay for school
- Save for retirement
- An instant emergency funds
- Start your own business
Why is Lifestyle Creep so scary?
The reason it isn’t called Lifestyle Shock or Lifestyle Explosion is because it is not an immediate startling event. It “creeps” up on you without you even noticing!
If you notice yourself buying new things to “keep up with the Jones’”, recognize that you are being exposed to lifestyle creep from an outside source.
Think back to when you’ve received a raise or bonus. Did you immediately spend it? That is a sign you’ve been exposed to lifestyle creep.
If you notice your have way too many things, yet you continue to purchase more, well you probably just have a spending problem.
How to avoid Lifestyle Creep:
- Use the 50/20/30 principle.
- Budget whenever you have an increase in income.
- Pay yourself first.
- Don’t compare yourself to others and spend the way they do.
- Be frugal. People often think frugal is a bad thing because you are “cheap”. That is not the case. Frugality is a positive habit that will benefit you in the long run.
- Increase wealth not possessions. Focus on making connections and having real life experiences rather than buying lots of new things.
This concept can be adapted for any scenario, regardless of whether you make more or less than the following example. Now keep in mind that this isn’t for everyone. If you are currently living in extreme poverty and working hard to get an increased income, it is a fair assumption that you would need to increase your quality of life. The following scenario is for someone who has an established current lifestyle and gets an expected/unexpected increase in income.
If you are currently making $2500/month and are living with this income; you are able to live, eat, and function fairly comfortably, that’s great.
You get a raise and now earn $3000/month. Subtract your previous income from your new income.
$3000-$2500 = $500
The same day you get paid, put that money immediately onto any debt you have. If you do not have any debt, put that entire amount into an investment or personal savings account.
You already know that you can live off $2500/month. Don’t allow yourself to get used to living off $3000/month. If you do, it will be much harder lower your month expenses in the future.
Use increased income and extra money to increase your wealth, not your possessions and debts.
Have you or anyone you know ever fallen prey to Lifestyle Creep? Do you think Lifestyle Creep is a good or bad thing? Let us know what you think!