Lifestyle Creep

August 09, 2018 | Sam Rook


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Your fastest growing “asset”?

                Lifestyle Creep is that phenomenon where your lifestyle spending grows as your discretionary income grows and former “luxuries” become “necessities”. It used to be that a $5 latte was a treat and now it has become any every day item. You used to be fine driving the 2 year old Honda Accord but now you get the brand new BMW. Lifestyle Creep affects all of us and it is the main reason why many people struggle financially. We often refer to it as “keeping up with the Jones’” and the peer pressure we feel to match our friends in their lifestyle creates a trap that imprisons far too many people.

 

                I got thinking about this idea after reading this great piece by Morgan Housel of the Collaborative Fund: http://www.collaborativefund.com/blog/the-spectrum-of-financial-dependence-and-independence/ . It is an interesting exercise to consider my role in big-picture terms of providing financial freedom, rather than to look at it as small-picture portfolio management. The idea of managing a family’s savings is often complicated by their ability to save, which is chiefly a function of Lifestyle Creep management. I have an example to illustrate my point.

 

                Take two hypothetical clients whom work in the medical field. Both do similar jobs so their income during their career would be remarkably similar- certainly within 5% in any given year. One client realizes very early that their pay will keep going up so they could afford the extra vacation or the third dinner out a week. The mindset can be summed it up perfectly as “I am living the doctor lifestyle”. The other client realizes the exact same thing. His income will grow over his career but instead of runaway lifestyle creep he caps his increasing lifestyle expense at ¼ of his income growth. This allows him to save money which he can now invest anyway as he sees fit. Having lowers expenses during your life also allows you make different investment decisions.

 

                Now this is a bit of a trick because both hypotheticals are going to be fine [Narrator: Doctors, after all] as they hit retirement but the second family has a totally different degree of freedom than the first. First, they feel no pressure to keep up with anyone else and their lifestyle, which is important for them. Second, they already have lived a life at a lower expense level so they need less in retirement. Being forced to cut expenses from your lifestyle when you retire is emotionally exhausting when every “luxury” became a “necessity” over time. This is the truly painful part of Lifestyle Creep.

 

                Lifestyle Creep affects all of us whether we are Doctors, Software Engineers, Plumbers or factory workers. The pressure to have the newest thing is enormous. Once you are on the treadmill it becomes really, really hard to get off. There is a formula to help yourself though and it comes with a change of your mindset. Here is how:

 

                                                                Income – Expenses = Savings

 

                                                                Income – Savings = Expenses

 

                You can probably figure out which of the hypotheticals above lived using the first equation and which used the second equation. That simple change to put savings ahead of expenses can make all the difference to helping you get off the treadmill of creep. It requires you to commit to a set percentage of your income to go towards savings. After that you can spend to your heart’s content. What you will find though, is that your heart’s content is less focused on the spending and becomes more focused on the saving. Under this mindset, you want to buy more savings. Three percent becomes four and so on and that is when you can politely put the Lifestyle Creep treadmill in the garage along with that Nordic Track you absolutely were going to use at home every day.

 

                As Morgan Housel eloquently put it, “independence is owed to a slim lifestyle, rather than huge assets. You realize that lifestyle desires compound faster than almost any asset.” Are you chasing a lifestyle or are you chasing financial independence?