If you’ve ever received a raise at work or switched to a higher paying career, you’re familiar with the exciting rush that comes with that first paycheck. You’ve marveled at the practically sparkling new number and thought about how magical your life will soon be because of all this extra income.
Or, if you’re anything like Dylan, one of our very own designers, you know straight away this paycheck won’t make your day-to-day life much different. Dylan works pretty hard to avoid lifestyle creep — a term applied “when an individual’s standard of living improves as their discretionary income rises and former luxuries become new necessities” (Investopedia).
We were curious to hear more, so we sat down with Dylan (virtually, of course) to pick his brain.
Q: When were you first introduced to the concept of lifestyle creep?
A: I was fortunate that my mum worked at a bank while I was growing up (hi mum!) She taught me about living below your means, the importance of saving, and avoiding debt at all costs. Part of this early financial education included an explanation of lifestyle creep, but it didn’t really apply to me since I was only a kid.
Skip forward a decade or so to when my hometown experienced a tremendous recession. Plenty of people were losing their jobs (and their six-figure salaries) every week. It was hard enough to find a new job, and the jobs that were available didn’t pay nearly as much as they used to. People had to sell their homes, their cars, and their possessions. It was awful.
I started to wonder what would happen if I lost my job. Would I be ready to handle it? And that’s when those early conversations came back to me. I looked at my finances and, sure enough, I was falling victim to lifestyle creep. I received a few raises over the years and with each raise my rate of spending would increase, too. It’s true what they say: former luxuries had become necessities.
Thankfully I wasn’t too far gone and I started taking steps to counteract the lifestyle creep.
Q: In your own words, why is it important to avoid this creep?
A: Lifestyle creep can actually backtrack you on your savings journey. For instance, if you have a $1,000/month lifestyle, the $10,000 in your savings account will last 10 months. But if your new monthly lifestyle requires $1,500, that same pile of savings will only last 6.6 months.
This is why I think of lifestyle creep as a trap. It can trap you into living a certain way. It can trap you at a high paying job that you hate. It can trap you in the workforce until 65 and still leave you with less money than you need to live comfortably in retirement.
Not succumbing to lifestyle creep increases your flexibility. You can take that job you’re passionate about even if it involves a pay cut. You can maintain the same quality of life in retirement. Avoiding lifestyle creep gives you space to breathe.
Q: How do you keep the balance between limiting lifestyle creep and maintaining (or improving) your quality of life?
A: If you’re already living comfortably, maintaining your quality of life is the easy part. When you get your next raise, don’t let yourself get used to the new paycheck. YNAB makes this easy with the To be Budgeted feature. After every paycheck just remember to move the difference of your new paycheck and old paycheck out of To be Budgeted and into debt payments or savings first. Then continue budgeting like normal.
Improving your quality of life is trickier. First, you can ask how much lifestyle creep is acceptable to you. Let’s imagine you start spending all of your next raise (hey, it’s easy to justify and even easier to do). When you spend all of your raise, you could consider that 100% lifestyle creep. Now let’s say you decide to save half of your raise and spend the remainder. That would be 50% lifestyle creep.
Next, and this part is more difficult, you can work on cultivating contentment. This involves being satisfied with the things you have instead of lusting after things that you don’t.
I have one exemption to my lifestyle creep goals and that’s travel. I will not give up meaningful travel experiences just to save extra dollars. I feel okay (and maybe even proud!) to decrease my savings rate for a month of two if it means I get to experience something great and potentially life-changing.
Q: Do you have a side hustle or any extra income that goes straight to savings or an investment?
A: I’m fortunate that my day job provides me with enough money to survive. That means I can spend my spare time with family, friends, or on hobbies. But I’m just like everyone else. I still see things that I’d like to have. When there’s something I want but I can’t “afford”, I can always take on freelance work. Here’s the twist: I don’t like freelance work! By putting myself through something I don’t like I can be sure that this thing is actually something I want. The alternative to this is saving and waiting, which is a different kind of discomfort.
So to answer your question, it’s the opposite for me. I use my side hustle to build up the funds to buy something luxurious.
Q: Do you have any advice for someone who may be caught up in lifestyle creep and is looking for a way out?
I started cutting out the lifestyle creep by paying myself what I made before my latest raise. Once I was comfortable with that paycheck I went back to the raise before that, and then the raise before that. Each time I went back to a previous raise my savings rate increased dramatically and I learned how to live on less.
I got discouraged as soon as I discovered my lifestyle creep. I remember going through my budget and struggling to find areas I could cut. All of these things that I now considered necessities were in fact luxuries. And when we’re used to something it’s painful to give it up!
If this is something you’re interested in but you can’t make adjustments to your current quality of life, don’t stress. It’s not worth it to cut back if it would damage a relationship or cause too much pain. Instead, make a plan for the next raise. Don’t give yourself the chance to get used to the next paycheck.
Going forward, there are three things you can keep in mind to avoid lifestyle creep:
- Defer rewards: save now so you can spend later
- Revisit your priorities: assess each goal and category on a regular basis
- Give yourself grace!
Cutting back on lifestyle creep can be a tough sell but the long-term reward (and peace of mind!) is so worth it.
Your Next Step
Budgeting is not restrictive. You won’t be spending less, you’ll be spending right. So what do you have to lose? Except all that debt and stress?