INSIDE: The how, what, when, and where of the lifestyle creep. Otherwise known as lifestyle inflation and the thing that sucks up all your money the more you earn!
[Morning! Please enjoy this guest article today from my boy Nick over at Side Hustle Nation who stops by the blog to share the evils – and perks? – of lifestyle inflation with us. Always gotta stay vigilant as it’ll get you good if you’re not paying attention! Help us out, Nick!]
Most of what you’ll find on the Internet are articles on how to avoid lifestyle inflation and why it’s “the biggest threat” to your financial future.
Perhaps there’s some truth to that, but I think if you allow yourself to “creep” with intention, you, your family, and others can all be better off.
After all, isn’t that the point of making more money?
In this post, I’ll attempt to cover:
- What lifestyle inflation is
- Why it’s potentially super-risky
- How to consciously evaluate “creepy” decisions
- The alternative: lifestyle optimization
What is Lifestyle Creep (Lifestyle Inflation)?
Before we get too deep into it, it might be helpful to offer up a definition of lifestyle creep. Lifestyle creep, or lifestyle inflation as it’s sometimes called, is the process of living up to your means.
It means increasing your spending as your income increases.
Let’s say you earn $50,000 a year. If you’re anything like the average American, you’ll end up saving a little over 5% of that.
Consider that 5% of $50,000, or $2,500, your annual profit margin for the year. In other words, your lifestyle cost $47,500 that year.
Now let’s say over the course of a few years you end up changing jobs, starting a business, or getting a series of raises. Now you’re earning $100,000 a year.
If you kept your lifestyle costs the same as they were when you were making $50,000, you would have just had a very profitable 12 months!
But in most cases, as you earn more, you start to spend more too. And that $47,500 lifestyle quickly becomes a $95,000 lifestyle.
It doesn’t happen overnight; it just “creeps” up on you. That’s lifestyle inflation.
It’s only natural — you can afford it!
A nicer car, a bigger house, better clothes, fancy vacations, expensive restaurants. Those are all common ways your lifestyle can begin to creep back toward that average 5% savings rate.
Why is Lifestyle Inflation Risky?
Lifestyle inflation has been called “the biggest threat to financial planning.”
But what’s so bad about rewarding yourself when you earn more?
The main issue financial planners and other money nerds get worried about is having enough. And “enough” is commonly defined as 25x your annual expenses.
Save that much and invest it responsibly and you’re theoretically set for life.
That means at your $47,500 annual lifestyle cost, you’d need to amass a nest egg of almost $1.2 million.
But at a $95,000 lifestyle cost, you’d need double that–almost $2.4 million.
And that’s the biggest risk and downside to lifestyle inflation: it prolongs your path to financial freedom. And in some extreme cases, may even make retirement unattainable–at any age.
What’s the ultimate lifestyle upgrade? How about being able to spend your time however you want.
How to Avoid (Ineffective) Lifestyle Inflation
Lifestyle inflation is often associated with a “keeping up with the Jones'” mentality. At its worst, it’s a rush to buy stuff we don’t really need that makes zero impact on our long-term happiness.
Indeed, researchers have found a surprising trend they’ve called “hedonic adaptation.” This explains humans’ tendency to return to a baseline level of happiness relatively quickly after things happen to them–good or bad.
It explains why people who win the lottery aren’t the happiest people on the planet. In fact, many wish they’d never won in the first place.
So how can you avoid unnecessary or ineffective lifestyle creep?
#1. Establish a Comfortable Baseline to Avoid Lifestyle Inflation
Make sure your basic needs are met. If you’re hungry or don’t have a safe place to live, those are naturally “lifestyle creeps” that make total sense!
#2. Treat Your Household Budget Like a Business
Thinking about your budget and surplus income as household “profit” is my favorite way to re-frame spending. As income increases, we become more profitable.
To be sustainable, a business needs to make a profit.
Your household is the same way. You can’t lose money every year — or even break even — and survive long-term.
But businesses spend money too. They just spend on those things they think will generate a positive return.
Consider the same with your household spending.
Will that bigger house make you happier in the long-run? It’s possible. But it might also mean a snowball effect of higher utilities, maintenance costs, weekends spent doing yard care, and expensive home improvement projects.
#3. Sit on it
When you’re making a big purchase decision, or even some smaller ones, can you revisit it next month? Or next year?
If that inaction saves you hundreds or thousands of dollars a month, that’s worth a huge amount to your long-term financial independence.
This is a really important one when it comes to overcoming lifestyle inflation.
Because of compound interest and the time-value of money, the longer you can defer lifestyle inflation, the better off you’ll be down the road.
We have an inherent understanding of this. At retirement, an extra $500 a month invested when in your 20s will be worth a lot more than an extra $500 a month invested in your 50s.
After graduation, I was in a big rush to “grow up” and get a place of my own. Looking back, I think that was a mistake.
Living like a college student for even just another year or two would have made my personal profitability much stronger as a young professional.
How to Evaluate New Spending to Avoid Lifestyle Inflation
In our house, we have a few frameworks we use to evaluate new spending.
Know What You’re Really Buying
The first is trying to determine what we’re really buying.
Are we buying quality time, sanity, experiences? Are we helping others? Are we taking away some significant pain?
This is inspired by Tim Ferriss, who recommended asking something like this: “How can I ‘waste’ money to make life easier or better?”
If we can be confident our money will have a positive impact on our well-being or happiness, we gladly part with it. That’s one reason we travel as much as we do and why the kids go to daycare (more on that below).
Is it a One-Time Purchase or a Recurring Expense?
The other important consideration to make when evaluating new spending is whether it’s a one-off purchase or a new ongoing monthly expense.
Naturally, we’re quicker to make one-off purchases that make our lives better than commit to a new recurring cost.
Is it a Band-Aid or a Permanent Fix?
Does the purchase solve the root problem?
Or does it just mask a symptom?
If the problem is temporary, a “Band-Aid” solution is probably fine. But for longer-term problems, you’re better off buying a permanent fix.
Is it Easily Reversible?
Before I buy something, I almost always check the return policy. If I don’t like it or change my mind, can I get out of it?
On bigger purchases without a return policy, could you re-sell the item to another owner?
Does this Purchase Have a Snowball Effect That Will Lead to Lifestyle Inflation?
Some purchases don’t end when you sign on the bottom line or swipe your credit card. Some end up costing you more for years down the road.
That bigger car? Yeah, it’s going to cost more to fill up every time you need gas. It’s going to cost more to insure. It’s probably going to cost more to maintain.
That bigger house? It’ll cost more to heat and cool. You’ll pay more in property taxes and mortgage every month. You might need more furniture.
But it’s not all bad — some “snowballs” are good. What if you move closer to work? There’s a positive snowball effect there of shorter commute times, less money spent on gas, more time with your family.
And that leads me to my counterpoint about lifestyle creep. What if we approached new spending as a chance to optimize our existence?
The Alternative: Lifestyle Optimization
If there’s one thing that gets me fired up, it’s the idea of optimization, progress, and improvement. (In fact, we gave our first-born the middle name Kaizen, meaning “continuous improvement.”)
So instead of blindly letting your lifestyle “creep,” consider how you can use your money to optimize your life.
What would that look like?
What’s the right balance of spending, saving, and giving?
Ramit Sethi argues that you should spend “lavishly” on the things you love, provided you ruthlessly cut costs on the things you don’t.
What could you buy to genuinely make your life (and the lives of others) better, not just today, but in the future as well?
That’s lifestyle optimization, and really that’s the whole point.
Where Have We Optimized?
While our household is still solidly profitable, we certainly spend more than we did a few years ago.
Here are some things we spent / are spending money on:
- An e-bike. I freaking love this thing. We ride to preschool almost every day and I ride it downtown as well. So far it’s taken 750 miles off my car. (An example of a one-off purchase that saves money and brings joy.)
- TSA Pre-check. This is a total unnecessary luxury, but it just makes me happy every time I go through security. At $20 a year for 5 years, including Global Entry, it was well worth it.
- Running the air conditioning more. Even though the heat is usually pretty temporary, we’re more apt to cool off the house these days.
- Renewable energy. For our monthly power bill, we had the option to pay a little more to use electricity from 100% renewable sources. It was an easy decision.
- Health. Not that we ever ate really poorly, but we tend to buy supposedly cleaner, healthier food. I go to a weekly yoga class for flexibility and injury prevention. I started getting annual WellnessFX blood tests.
- Books. I still get a lot of books from the library, but if I see a title on Kindle I want to read, I’m quick to order it.
- Clothes. I don’t buy a lot of clothes, but when I do, I try and get something that fits well and will last. Sorry Old Navy!
- Giving. This is still a work in progress, but supporting causes we care about is becoming a higher priority.
- Slower travel. Recognizing that the transportation part is the most difficult part of travel for us these days, we’ve opted for fewer but longer trips if that makes sense. Fewer 3-day weekends and more week-long trips.
- Daycare (see below).
Most of these aren’t huge expenses, but make us happier people.
Kids: The Ultimate Lifestyle Creep?
Daycare for our two boys is our biggest line-item expense at the moment — over $2,300 a month.
Save for college? How about save for daycare; it’s immediate and it sure ain’t cheap!
But that daycare is part of our lifestyle optimization plan. It allows our boys to learn critical social skills, interact with kids and adults outside of home in a safe and structured environment–and importantly, it frees up time for me and mom to work. Work, I should add, that we both find fulfilling.
Studies show that raising kids costs $200,000 on average–not including college. But if you dig into the numbers, a big chunk of that is in buying or renting a bigger house. That’s one reason we’re trying to delay that as long as we can.
Could Kids Be Saving You Money?
I saw one semi-depressing anecdote the other day. It was from a parent responding to one of those “how much it costs to raise kids” articles.
Her argument was that kids actually save her money — because she’s stopped traveling and eating out!
For some parents, high achieving offspring are their retirement plan! No pressure, little ones :)
[EDITOR’S NOTE: Are you sure that wasn’t me? Haha… Here are 7 ways my kids save me money ;)]
Where Side Hustles Come In
As your income increases, look for ways to optimize your lifestyle.
That could mean eating healthier. That could mean building an emergency fund. That could mean giving to charity.
But don’t just blindly spend more just because you can. Lifestyle inflation will get you every time. Spend with intention and I’m confident you’ll be happier as a result.
How has your lifestyle crept over the last few years? Are you happy with your return on investment from the increased spending?
Nick Loper is the Chief Side-Hustler at SideHustleNation.com and quite possibly loves the hustle even more than J. Money… He’s also an avid skier, author, business nerd, podcaster, Seattle sports fan, and a parrothead. He can be found on Twitter at @nloper.
Jay loves talking about money, collecting coins, blasting hip-hop, and hanging out with his three beautiful boys. You can check out all of his online projects at jmoney.biz. Thanks for reading the blog!