Photo by Tessy Agbonome
When it comes to personal finance, the seductive allure of lifestyle creep and its close companion, lifestyle inflation, poses a significant threat to individuals striving for financial security. Recent reports suggest that nearly half of $100,000 earners are living paycheck-to-paycheck, with lifestyle creep playing a pivotal role.
When people start to earn more money, they spend more and save less.
Lifestyle creep/lifestyle inflation can derail retirement plans and debt reduction as frugality is replaced by spendthriftness, according to Investopedia. And, lifestyle creep can start small, such as ordering a more expensive meal at dinner or splurging on an electronic item you don’t need.
Here are five things to know about avoiding this seductive financial trap.
Lifestyle creep, often interchangeably referred to as lifestyle inflation, quietly infiltrates your financial life. This phenomenon occurs when your income rises, and your spending seamlessly adjusts to meet the new financial threshold. It can jeopardize financial goals, leaving many entrapped in a cycle of paycheck-to-paycheck living.
According to Ramsey Solutions, lifestyle creep can happen at any life stage–raises, side hustles, promotions. If you are not intentional with your extra income, you can fall into a financial trap.
“So, if your spending is on the rise but your savings isn’t, that’s another clue you might be experiencing lifestyle creep. Little luxuries have become common habits,” explains financial guru Dave Ramsey.
Recent statistics highlight the prevalence of paycheck-to-paycheck living, with 62 percent of consumers falling into this category as of November 2023, according to LendingClub. The impact is discernible across income brackets, affecting 77 percent of those earning less than $50,000 annually, 67 percent within the $50,000 to $100,000 range, and even 45 percent of consumers earning over $100,000. Lifestyle creep plays a significant role in perpetuating these struggles.
“Unfortunately, a lot of times when we make more money, we think that we should spend more money too,” explained LaShawne Holland, a wealthy lifestyle coach, to KATU.
Often, the desire to spend more accompanies an increase in income, leading to unwise financial decisions. Recognizing the importance of not living off 100 percent of your income is crucial, as blindly earning and spending without considering investments can hinder financial growth.
To avoid falling victim to these financial traps, adopting proactive strategies is essential. Holland recommends reflecting on the significance of purchases, questioning whether they genuinely add meaning to your life. Establishing a comprehensive plan for spending, saving, and investing serves as a robust defense mechanism against the subtle encroachment of lifestyle creep.
According to Ramsey Solutions, budgeting is necessary.
“Budgeting is the key to getting ahead with your money. A budget is just a plan for your money. And that’s exactly what you need right now. Lifestyle creep happens when you have no plan for your extra income. You spend it—but not in a way that reflects your personal values and gets you closer to your dreams for the future,” says Ramsey.
He advises, “Get on a budget and track every single transaction so you can see where your money’s going—and start telling it where to go. This is how you take control. This is how you get ahead.”
Aspiring to financial goals such as building emergency funds, paying off debt, saving for significant life events, and investing in retirement requires intentional and mindful financial decisions.
Photo by Tessy Agbonome: https://www.pexels.com/photo/smiling-woman-with-an-updo-holding-up-shopping-bags-16385801/
