Earning a high six-figure income is a wonderful thing, but it can also make you susceptible to lifestyle creep. For example, new lawyers and doctors. After years of self-deprivation, a sudden rise in income makes lifestyle creep unavoidable. After all, who can blame them for wanting to upgrade from their former meager lifestyle as students, However, what many don’t realize is they’re slowly trapping themselves into a vicious cycle of working more to spend more. This doesn’t need to be you. Since you were already making a comfortable living before remote jobs stacking, you should avoid lifestyle creep by forcing yourself to live within the income of just one job.
After all, you don’t want your spending habits to trap you into working two remote jobs permanently. Ouch! In this post, we’ll discuss 7 tips to help you avoid lifestyle inflation when your income doubles. But first, let’s define lifestyle creep and how you can spot it.
What is Lifestyle Creep?
Lifestyle creep, also known as lifestyle inflation, occurs when someone increases their standards of living in parallel with their increasing income. Generally, lifestyle creep is a gradual progression of increased discretionary spending that one experiences after receiving a raise, promotion, a second job, or any other source of extra income.
Some even experience lifestyle creep without an increase in income when they pay off debt which frees up income that was once tied up to financial obligations such as a mortgage, credit card debts, or student loans. The temptation to live a more luxurious lifestyle is often too strong for the average person to resist, especially when faced with discretionary income and easy credit. It becomes a vicious cycle of working yourself out of debt and then falling right back into debt – a modern-day debtor’s prison.
Similar to a frog boiling to death, the lifestyle creeper does not feel the negative impact and opportunity costs of lifestyle inflation until it is too late – when they’re in their 60s and still have to work two remote jobs to make ends meet.
Therefore, the first step to behavior change is awareness. Below we’ll point out some signs of lifestyle creep and help you reflect on some lifestyle choices. As my economics professor once said, life is full of trade-offs.
Signs of Lifestyle Creep
When experiencing lifestyle creep, things and activities that were once luxuries are now “necessities”. Those suffering from lifestyle inflation tend to have the same telltale signs:
Buying a new luxury car
Who doesn’t like that new car feeling even when your current car works just fine? This is a perfect example of keeping up with the Joneses. Model S Plaid anyone? What the Joneses didn’t say is how hard they have to work to support this expensive lifestyle, or that they’re nowhere near financial independence. As my uncle Ziggy once told me, the Joneses have “big hats but no cattle.”
Increased social and entertainment spending
As restaurants and bars re-open, it’s easy to fall into increased social spending when you’re making double the income of your friend. You may notice more frequent social outings and finer dining. You might even start to act like Allen Iverson treating his posse when you’re out on these escapes.
But hey, work hard play hard, right? These lifestyle inflations and social status games usually end up in tears and regrets. Don’t be that guy or gal.
Whimsical shopping sprees
So, this might not be you but your spouse. Either way, it impacts the family bank account. Look around the house, is stuff accumulating all around you like a Tonal smart gym or a fancy electric-powered bicycle? If so, you and your family likely have fallen into a lifestyle creep trap.
Frivolous vacation extras
Been hitting the hotel room minibar when once upon of time you won’t even touch it? Are your vacations poorly planned with overly expensive accommodations and first-class plane tickets? These are also the common sins of lifestyle creepers.
Lack of savings: Decreasing or stagnant savings is a sign you are spending equal or more than what you’re taking in. Disregarding savings can lead to unnecessary stress when faced with an emergency. Worst of all,
Lack of budgeting and savings
Maybe you avoid checking your bank account balance because you feel you have no control over your spending habits. Creating a budget is crucial to automating your spending and keeping it in check. A budget keeps you accountable as well as helps you put a portion of your income towards saving and investing.
A lack of savings means you aren’t making progress towards financial independence and breaking away from work permanently. It could also put you in a financially stressful situation if and when unexpected emergency happens.
This is the big kahuna warning sign. Did you take out a 100k car loan for that Model S Plaid?
You get the point. A sudden increase in debt-to-income ratio when your income just doubled is a huge sign of lifestyle inflation. Ideally, your debt-to-income ratio should be 1 or less, ideally zero. An increasing debt-to-income ratio means your debt is growing faster than your income. That’s no bueno, my friend.
Notice how most of the telltale signs of lifestyle creep are the result of spending on “things.”. We’re a big believer in spending to save time, make memories, and help a worthy cause. After all, you should get a forever compounding return for spending your hard-earned money. You can’t get that from things.
7 Tips on How to Avoid Lifestyle Creep
1. Write down your goals
You’re more likely to commit to a goal and hold yourself accountable when you write it down. Whether your goal is to take a mini-retirement or reach early financial independence, make sure they align with your overall lifestyle. Make a plan with a fee-only certified financial planner (CFP) and review the plan annually. Then automate your check-in with your CFP, who serves as your sounding board for strategies you’re employing to reach financial independence.
2. Create and stick to a budget
Create and stick to a budget in order to stave off lifestyle inflation. It is best to have a system to review major expenses regularly, much like the annual performance review. An example of a great budgeting system is zero-based budgeting, practiced by well-run frugal companies.
Zero-based budgeting (ZBB) is a budgeting method that involves developing a new budget from scratch every time, starting from zero and reviewing all “necessary” and discretionary expenses. No stones are left unturned.
Putting it into practice, ZBB means you should review your household budget each year. Did you overspend or underspend this year’s budget? A simple way to operationalize this as a couple is to have a joint bank account set up to auto-pay all credit cards used to spend on shared expenses, including mortgage, car payments, childcare, utilities, etc. For contribution, each person shall contribute their fair share based on household total gross income (taking a page from the progressive tax system).
While it is similar to the 50/30/20 budgeting system, zero-based budgeting is more efficient and not as complicated. You also do not need to carry over any money from your current budget year to the next year (windfall could go into the bonus vacations pile, the shortfall will require a one-time joint tax to fund the over-budget expenses).
With zero-based budgeting, you do not carry over money from last year into this year. You start from zero at the beginning of each year. The main benefit of zero-based budgeting is that it forces you to think about and justify every single expense that you make. And it highlights the spending choices you’ve made this year and what’s planned for next year.
3. Max out your 401K
Maxing out your 401K is by far the most automated way to boost your savings while limiting lifestyle creep. Think of 401K as“pre-budget, paying yourself first before you can spend. By maxing your 401Ks, you not only minimize the chance of lifestyle creep but you’ll also save on taxes. And if you start early enough, your retirement nest egg will have more time to compound and grow larger by the time you reach retirement age.
Bonus: if your employer offers a 401K match, then you’re leaving money on the table by not contributing at least enough to capture the full match.
4. Take the average when comparing yourself to others
Many would say don’t compare yourself to others but this isn’t the best advice as roughly 10% of human thought involves comparison. It is okay to compare yourself to others, comparison is human nature. Just be sure to compare all across the board to those above and below you.
When we compare ourselves to others, we tend to compare our worst traits against other people’s best traits. This obviously can lead to wrapped reality, the most relevant being envious of what nice things other people have which leads to reckless spending habits to compensate.
Be sure to remember how far you’ve come and how many people wish they were in your shoes. Perhaps there was a time when you dreamed of making as much as you make right now, from far below where you’re at now.
When you appreciate what you’ve accomplished and are grateful for your own life circumstances, you’ll be less likely to seek social status through vanity spending. Remember, when comparing, look up and down to get the average.
5. Spend intentionally not mindlessly
Our online world is full of ads trying to pull you into a state of mindless spending. Be intentional about how you spend your money. For me, I spend generously on food, health, and making memories but miserly on cars, jewelry, and electronics. You get the idea, spend on experiences over things.
You should be mindful of your spending habits by tracking major spending drivers such as your mortgage, car loans, and medical expenses. One of the strongest indicators of lifestyle inflation is increasing spending on “essentials” when you can buy a house in a more affordable neighborhood or drive only used cars. Better yet, try going down to one car or using an electric-assisted bike. In order to avoid the “necessity” creep, be sure to track the growth rates of discretionary versus non-discretionary expenses as a percentage of your overall expenses. An increase in non-discretionary spending is usually a sign of lifestyle creep or justifications of some things are necessities when they are really just nice to have.
Bottom line: being mindful is one thing but also the numbers don’t lie. If you track your major spending drivers they will show you where your money is going over time. Lifestyle creep only occurs when you aren’t tracking your spending.
Finally, don’t overcomplicate on tracking spending. A simple review of annual credit card summaries or bank statements should suffice. Remember, we want to be intentional about our major spending drivers but not to sweat the small stuff. Make sure you’re not reacting to ads and mindlessly spending.
6. Practice Stealth Wealth
If you’ve experienced a significant increase in income from a second job then you might notice acquaintances, friends, and even family starting to rub shoulders with you more often in attempts to get a piece of your pie. However, it doesn’t have to be this way. If no one is aware of your sudden wealth then no one will treat you differently. That’s the beauty of stealth wealth.
For all intents and purposes, it is best to tell no one about your financial situation other than your spouse. Let go of any ego or status games regarding your increased income. Continue to live a modest life – drive second-hand cars, live in a modest house in an average neighborhood, and not flaunt your wealth by any means. Funnel that extra income into paying off debt and saving and investing aggressively. Your future will thank you for it.
7. Budget for Major Purchases
In the event you decide to make a major purchase, you should create a budget and fund the purchase in advance. This is going back to intentionality, setting aside separate savings for a big one-time purchase. Ally bank has a feature where you can establish a sub-savings account exclusively for that purpose without having to open up another savings account.
Aim to save at least 50% of the big purchase in advance. This will give you a buffer in case you want to make increase your purchase or buy something else. By exercising the discipline of saving for a big purchase, you’ll avoid incurring additional debt and paying unnecessary interest. You also get peace of mind from knowing you completely own what you just bought. Try it when buying new cell phones or a used car with all cash. The joy of not owing anyone money will also help with avoiding lifestyle creep.
Key Takeaways to Avoid Lifestyle Creep
While self-discipline and financial literacy is the first step toward avoiding lifestyle creep, we also recognize that when your income rises quickly that money scripts (unconscious biases about money) will trick you into overspending. The key is to elevate our awareness and create a system to combat these money scripts. Be intentional and brutally disciplined with how you spend your money.
Without fail, if you simply write it down on paper and commit to spending no more than the take-home pay of your lowest-paying job, then we’re confident that you’ll reach financial independence in five to ten years. Within your J1 pay, you can treat yourself guilt-free. Go ahead and buy that matcha latte every day or take that fancy river cruise you’ve always wanted. Treating yourself within your means is just as important as preserving your growing wealth if you want to enjoy your money in the long run.
Join our Discord and share with others ways to overcome money scripts and tamed the temptations of lifestyle creep.