Lifestyle creep or lifestyle inflation describes a situation where someone's disposable income increases due to an increase in pay or decrease in expenses; and former luxuries become necessary spending. It's a change in thinking and behaviour.
Most people will experience varying degrees of lifestyle creep in their lifetime. For many of us, our first thought when receiving an increase in pay might be to treat yourself to a small (or large) luxury. But the problem occurs when treating yourself doesn’t stop at just one luxury and suddenly you have upgraded your wardrobe, your phone and your car. You’re then locked into a more expensive lifestyle and you’re actually not saving any more money than you were when you were on a lower salary; when a smarter decision would be to save or invest the extra money instead.
So how do we avoid lifestyle creep?
1. Recognise it when it happens to you
Because lifestyle creep is a gradual process, you may not have realised that you have fallen prey. If you are finding yourself living pay cheque to pay cheque even after receiving a pay rise, you are probably in the midst of lifestyle inflation.
Once you can admit that you are suffering from lifestyle creep, sit down and write a budget. List all your outgoing expenses and minus them from your take-home pay. Now see what expenses could be cut down or are not necessary. Ask yourself If you needed that expensive car or phone five years ago? Could you live without it and downgrade to what you were previously accustomed to?
3. Lock away your savings
Once you have completed your budget and audited your expenses, you should see a whole lot of cash cleared up. Instead of leaving it in your spending account where you might be tempted to splurge, lock it away in a savings account that penalises you for withdrawing, invest in the stock market or contribute to your superannuation.
Next time your discretionary income increases, allocate the extra cash to automatically transfer to either a savings account or your super fund. If you leave all your pay cheque in your spending account, it will be absorbed into your lifestyle and it can be very tricky to untangle it.
4. Allow yourself luxuries occasionally
You earnt that pay rise, so you deserve to reward yourself. Allow yourself to purchase a new handbag or upgrade to a nicer hotel room once a year, but treat these things as you did before, as luxuries and don’t get stuck in an ongoing contract for something you don’t need. You will appreciate these luxuries so much more when they are just one-off treats and knowing you can afford them.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.