When it comes to finances, it’s the subtle changes that often hurt your bank account the most. You spend a little more here and a little more there without even realising it, and suddenly hundreds of pounds are gone. These are pounds that could be serving a much better purpose in your retirement account or even as part of an emergency fund.
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So what exactly is lifestyle creep?
Have you noticed that every time you receive a pay rise, your life suddenly becomes more expensive? All those things you once considered luxuries start to become must-haves as you find yourself in a better position to afford them. Or maybe you start telling yourself you ‘deserve’ this or that because of how hard you’ve been working. This is exactly what lifestyle creep – also known as lifestyle inflation – is all about. You steadily upgrade yourself to a more expensive lifestyle, likely without even realising it.
The changes often start very small, according to Investopedia. You begin eating out twice a week instead of once, or you start going to more expensive restaurants. Then, you decide to replace your car sooner than you need to or start thinking about moving to a bigger house.
For many, lifestyle creep could come from moving into a new, wealthier social circle. If you don’t have the money to back up the new lifestyle, it could lead to you accumulating debt. The average credit card debt per household in the UK is now £2,033. At an average interest rate of 20.65%, accumulating extra credit card debt for luxuries could cost you dearly in the long run.
Why is lifestyle creep so bad?
Simply put, any money you’re spending is not being saved or invested. You might not think that the extra £100 a month you’re spending on an upgraded lifestyle amounts to much. But once you consider compound interest over a period of years, that money could have been worth thousands in the long run.
The danger is even bigger for older professionals. The closer you are to retirement, the chances are you are also at the peak of your career. This means a bigger salary, annual bonuses or opportunities to get bigger raises. Ideally, any extra money should be going towards your pension pot, not towards luxuries.
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Preventing lifestyle creep
The best way to stop lifestyle creep from eroding your bank account is to have a plan. If your wages are about to increase or you’re expecting a bonus, sit down to figure out a new budget. This will help you avoid impulse spending.
Next, decide on a monthly allowance for luxuries. If your monthly wages go up £300, give yourself permission to spend £100 and allocate the rest to either savings, investments or paying off debt. Spend that £100 on treating yourself rather than ‘upgrading’ your lifestyle.
For example, if you decide to switch to a more expensive gym or hairstylist, you’re automatically signing up for an ongoing upgrade. The problem is that this could soon stop feeling like a treat, so you might still be tempted to spend on other treats. If the pull to have some ‘fun spending’ is too great, give yourself permission for some extra celebratory treats the first month you receive the bigger paycheck. Then quickly move to your new planned budget that includes lots of saving and investing.
