man sitting on chair with book by Dmitry Ratushny courtesy of Unsplash.

Lifestyle Creep

Wooster Corthell |

A Quiet Yet Potent Foe

Lifestyle creep, also known as "lifestyle inflation," is an often-overlooked hurdle on your path to financial stability. Although it may seem innocent enough—after all, you've earned that higher income—lifestyle creep can stealthily undermine your efforts to build wealth over the long term.

How Lifestyle Creep Manifests

  • Sudden Surplus: The cycle usually starts with a pay raise, a new job, or another windfall. What begins as a celebratory dinner or a small indulgence gradually evolves into a lifestyle of higher spending.

  • Gradual Changes: These occasional treats subtly transform into frequent expenditures. Eating out at upscale restaurants, upgrading to the latest gadgets, or even splurging on a more luxurious home or car can slowly become the norm.

The Snare of Lifestyle Creep

We have a client who came into a considerable windfall. Based on our discussions, they decided to pay off their mortgage. The idea was to reinvest the money that was previously allocated for mortgage payments. However, when we met a year later for a financial review, we found that their annual savings had not increased. Instead of diverting those mortgage payments into investments, the money had gone into home renovations—a new bathroom, kitchen, and hallway.

The Consequences: Deferred Dreams and Missed Chances

  • Reduced Savings: Even if you save a consistent amount, lifestyle creep can effectively reduce your savings rate as a percentage of your income.

  • Limited Contributions: Less available income for investments means missed opportunities for compound growth, affecting your future financial security.

  • Debt Accumulation: At its worst, lifestyle creep can lead you to accumulate debt, negating any advantages your increased income might have provided.

This situation with our client is a great example of encapsulating the essence of lifestyle creep. What started as a decrease in expenses easily got absorbed by new or upgraded expenditures. It's a cautionary tale that demonstrates the importance of intentional spending and saving.

The Antidotes: Strategic Steps to Counter Lifestyle Creep

  • Regular Budget Reviews: Periodic reassessments of your budget can help you adapt to income changes and ensure you're still on track.

  • Set Clear Goals: Having specific financial objectives can serve as a constant reminder of what you're striving to achieve, helping you stay disciplined.

We also generally recommend saving at least half of your new income. It's a win-win: you get to enjoy your success and make strides towards your long-term financial goals.

The Fine Art of Financial Balance

Lifestyle creep is not inherently bad; it only becomes a problem when it diverts you from your long-term goals. The trick is to balance present enjoyment with future financial freedom.

 

Interested in a financial strategy that accounts for life's ups and downs? Why not schedule an introductory meeting with Wooster Corthell? For more financial tips and updates, follow Wooster Corthell Wealth Management, Inc. on LinkedIn.