How Lifestyle Creep Traps the Middle Class

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The Concept of Lifestyle Creep

Looking back at the last 16 years of my career, its obvious to me what I could have done differently with my earnings.  When I started out in my first staff accountant position in 2004, I was making $13.00 per hour.  I was a single mom and we were barely scraping by.  What made it possible to not starve was our $500 per month rent for our small, two bedroom apartment.

Fast forward to today, when I make more than 5 times that in salary, my mortgage payment is more than $2,500!  There are more people in my household now, including my spouse, two toddlers, older son, niece, and my mother.  So of course, we need a bigger space, more food, roomier car, etc; however, we could have settled for a cheaper home, paid cash for a car, and so on.

The concept of expenses increasing in relation to one's income is called Lifestyle Creep.  In order to build wealth, a person or family needs to create a gap between income and expenses.  Avoiding lifestyle creep is a primary way to achieve that gap.

Future Value of Money

10 Year Rent Trend - Lifestyle Creep

Even before I had a house full of people, I allowed my rent rate to creep up over time.  We moved a few times, and the cost of living differs in each area, but I'm confident we could have kept the rent to no more than $1,250 in each of the areas we lived.

What would my savings account look like now if I had taken all that extra rent money and invested in the S&P 500?

Let's assume over the past 5 years my rent or mortgage payment was locked in at $1,250 instead of the increases that are shown in the bar chart.  Let's also assume I invested the difference between the $1,250 and my actual rent cost and averaged an 8% return on those funds.  Calculating the cumulative future value of those invested funds, I would have an extra $81,077 in savings today!

Future Value of Cumulative Savings - Lifestyle Creep

What did I learn from this? When I tell myself that I deserve something better now, I am robbing my own future.

Control Thy Expenditures

When you hear the phrase “pay yourself first”, what it really means is pay your FUTURE self first.  If you spend it, its gone.  If you save it, you can use it to grow your empire.  In The Richest Man in Babylon, the legendary book that is considered the “Bible of personal finance”, George Clayson's first rule is to “start thy purse to fattening”, or to pay yourself first. He teaches readers to always retain for yourself at least 10% of your earnings.

His second rule is to “control thy expenditures”.  In the book he states, “what each of us calls our ‘necessary expenses’ will always grow to equal our incomes unless we protest to the contrary.”

I gave you one example with rent, but the same applies to choice of vehicle, cable bills, eating out, streaming services, gym memberships, and all other “first-world perks” we think we deserve.  But don't we also deserve to pay our future selves and build the capital that will allow us to do and have so much more?  And then maybe someday we can control our own daily lives instead of living at the mercy of an employer.  Now that would be a game-changer.

What each of us calls our ‘necessary expenses’ will always grow to equal our incomes unless we protest to the contrary.”
-George Clayson

Wealth & Status Symbols

In the The Millionaire Next Door, a 1996 book by Thomas J. Stanley and William D. Danko, a study conducted by Yale describes how individuals measure the level of their success through comparison to nearest neighbors and/or closest relatives. Therefore, as the level of income rises, so will their desire to outperform those that they compare themselves to.  Wealth, as displayed by worldly possessions, is a marker for success to those who do not possess it.  But this is a fallacy, and those who have true wealth, in relation to their annual incomes, do not adhere to such an idea.  The millionaire next door is a millionaire because he or she was able to avoid the temptation of lifestyle creep.

A hypothetical example in The Millionaire Next Door explains this concept. Teddy Friend grew up in a poor family but was still exposed to a rich lifestyle at school. He saw “rich kids” and decided that one day he would be “better off” than his poor parents. Sure enough, when Mr. Friend reached a high income level, he indulged himself in possessions. He bought a large home along with a foreign luxury car. He lives a very comfortable lifestyle in terms of possessions, but in terms of financial security, Mr. Friend's lifestyle is uncomfortable.

We have to change the perception that a nice car, a luxury watch, or designer clothing is a sign of success or status.  Once we transcend that idea, we can stop focusing on obtaining luxury possessions or stuff, and start paying ourselves first.

Lifestyle creep is the #1 reason the majority of middle class still live paycheck to paycheck.

“But my neighbor drives a Lexus and my coworker drives an Audi, and if I show up at work with anything less than a 5ct engagement ring my clients won't take me seriously!” I used to have this mindset.  Then I moved to Bend, Oregon where everyone drives a Subaru, even the wealthy. I realize that I never really needed the Lexus, but I'm trapped in a 3-year lease.  Lesson learned.

Personal Challenge

I am challenging myself to buckle down for the next year and see how much I can pay myself.  I'm writing down a goal and tracking it every month.  At the end of the year, let's see how much I saved.  I will put that money to work growing with compound interest in a money market account or investing it in the market. I will avoid lifestyle creep by saving any increases in income.

My savings goal this year is $24,000.  Added to my current savings, I will have a total of $50,000 by January 1, 2021.To achieve this goal, I will do the following:

  • I'm committing to never let my mortgage payment become larger than it is today.
  • I will cancel $100 in subscriptions that I pay every month.
  • When my lease runs out, I'm getting a cheaper car I can pay cash for.
  • I will limit eating out to twice per month.
  • Any bonuses or pay increases will go directly into savings. (Click here for ideas on where to keep your savings)
  • Any income from side hustles, including this blog, will go directly into investments in Lending Club or my brokerage.
  • I will complete an annual budget and track my progress each month. (Click here for ideas on how to build a budget.)
  • I will track my net worth monthly using the free Personal Capital app.

What is your savings goal for 2020 and what are you doing to avoid lifestyle creep?

3 thoughts on “How Lifestyle Creep Traps the Middle Class”

  1. To avoid lifestyle creep, I increase my retirement contribution every time I get a raise. I also maintain a spreadsheet that details our annual spending. The data is useful for budgeting/ controlling our expenses the succeeding year.

    A little lifestyle inflation is actually good for you. It means you’re making progress. The $500 to $2500 increase in housing cost could be worth it as long as you’re on track with achieving your other goals.

    Reply
    • Smart moves! I try to save all bonuses in addition to raises. The increased housing will pay off eventually when we sell the house, but other choices have not been the best, like my car lease. Room to improve, for sure. Thanks for your valuable input!

      Reply

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