The Creep
All around us we see our peers purchasing new cars, buying flashy material items and trying to keep up with the Joneses Kardashians. Unfortunately, the nature of our society promotes lifestyle creep but that doesn’t mean you have to surrender to it too. In this article we will focus on what exactly lifestyle inflation is and ways to combat it.
Lifestyle inflation is when spending habits increase slowly overtime parallel to increases in income. Some cases are more drastic than others, but for the most part you won’t even realize you are a victim of this until it’s too late.
It’s pretty simple. Don’t think about a raise or bonus as money you already have. Instead just keep living your life without it, don’t inflate your spending habits just because you can.
To quote Camilo Maldonado who wrote this Forbes article on the topic, “Think of it like a hot tub. If you get in and raise the temperature of the water, you’ll acclimate to it as the water gradually heats up. There you are sitting comfortably when a newcomer comes by to join you and tries to step in but finds its too hot”.
We have seen it time and time again. A recent college grad gets a good job and thinks its the perfect time to buy a brand new car. Then once their college loan grace period is over and they’re already paying their monthly dues for their brand new whip, they realize how big of a mistake they’ve made. Or let’s take a peek at your colleague who just got a major promotion and because of this promotion they feel as if they need to completely upgrade their wardrobe, car and add on a new addition to their house. These real life examples are just a glimpse into the effects of lifestyle inflation.
Don’t feel too guilty if you are struggling with lifestyle inflation. It’s in our DNA. Studies have shown that cavemen with more firewood or more food were the ones that would survive the longest, this is obvious right? But this ties into our constant need for more. When you boil it down, it is our survival instinct.
That being said, we are no longer cavemen/women. We are now in the Marie Kondo society where people are realizing that the clutter surrounding them in their homes is also cluttering their mind, if it doesn’t spark joy – get rid of it. It should be a simple concept but the masses miss the point. Below we list the biggest warning signs, see if they apply to you and use the steps outlined beneath to help rid yourself of inflated expenses.
Warning Signs
- Insufficient savings
- Credit card balances are carried over for months straight
- Constantly upgrading to the next best option
If these warning signs hit a little too close to home for you, don’t worry you’re not the only one.
The good news is that we have some recommendations on how to beat lifestyle inflation or avoid it altogether.
How to Beat/Avoid Lifestyle Inflation
Step 1: Budget
This point can not be reiterated enough. Budgeting is the root of financial success. This doesn’t mean that you need to be overly critical on your spending but it does mean that you need to sit down and figure out where all of your money is going.
If you are like most, this step will be eye opening and really help you get a grasp on where your hard earned dollars are vanishing to.
Take a good look at your finances. What could use a boost? Your retirement accounts? Your investments? Maybe you have debt with high interest rates that should be paid off. Weight out your options and choose which account(s) you will focus on first (step #2 shows you how to give them more love
).
When you are budgeting you will need to decipher what your wants and needs are. For example, you need shelter. Therefore, your housing expense is not optional (although you can read this article to show you how to eliminate it). A deeper look into your monthly spending with reveal exactly how much monthly income is going towards wants vs. needs and can motivate you into saving more.
By evaluating your wants vs. needs you will also be able to look further into how to minimize your costs. The lower you keep your costs, the more money you have left over to put towards savings, retirement, education, etc. This doesn’t mean you can’t treat yourself, but it does mean that you shouldn’t be over doing it. Also, if you switch your mindset into thinking that treating yourself can be saving money you used to spend on material goods or services and instead putting it towards a larger goal (i.e. retirement) then you will have no problem cutting back these expenses. You are holding off on instant gratification to help your future self.
Step 2: Pay Yourself First
Paying yourself first means investing in your future. In this specific context, I am referring to retirement or other savings. This can also mean debt! Paying down debt can be considered a form of savings since you are decreasing your liabilities and therefore increasing your net worth.
The easiest way to pay yourself first is to automate your payments. For example, if your paycheck comes in on the first of every single month then set autopayments for the same day or next day (depending on when funds are available) and have a set amount deposited into all of the different savings vehicles you want to utilize. This will make it hassle free and also lessen the chances of you dipping into that paycheck to pay for something you don’t need.
Step 3: Set Goals and Review Them Frequently
Reaching a goal is simultaneously one of the most fulfilling and motivating feelings out there. Set a couple realistic goals for yourself and set them for different timeframes (i.e. 1 month, 6 months, 1 year). These goals will help keep you on track and remember why you started to begin with. Review them frequently. I look at my goals on a daily basis to keep determined.
Check out Jake’s in depth article 3 Tips for Financial Goal Setting on setting financial goals and why you should be setting them.
Step 4: Track Your Net Worth and Savings Rate
One thing we like to look at is how these changes have affected our net worth and total savings rate. Tracking these items really helps you get a grip on your spending and avoid buying those big ticket items that may not be totally necessary. Apps like Mint or Personal Capital do all the work for you. But if you want to track these the manual way you can follow the steps below:
Net Worth = Total Assets – Total Liabilities
Create a list of all of your assets (only assets that you can sell and actually make a profit on) and all of your liabilities. It is easiest to create in in a spreadsheet, whether you use google sheets or excel, up to you. But utilize a tool that will save your work so when you revisit again you can see the changes you’ve made to you’re net worth overtime.
Savings Rate = Annual Savings/Annual Income
Annual savings means your total savings. This includes emergency funds, debt paydown, retirement savings, investment savings, etc. Annual income is your total income annually so think your 9-5 job and any other consistent streams of income.
Conclusion
Material items don’t equal success. The minute you start equating the two is bad news for your wallet.
If you are suffering from lifestyle inflation just know that you are not the only one and definitely will not be the last. And don’t forget the bright side – you can always fix it!
Thanks for reading! Please let us know how you are fighting lifestyle inflation in the comment section below.
