Is Lifestyle Creep Interfering With Your Investment Strategy?

Your investment strategy depends on your ability to make consistent contributions to your retirement funds over time, but your success relies on a number of factors, including the …

Retirement Planning

Your investment strategy depends on your ability to make consistent contributions to your retirement funds over time, but your success relies on a number of factors, including the consistency of your income, your ability to budget, the total value of your contributions, and how your investments grow over time. After a strong start, it’s easy to become complacent; subtle changes in your environment can add up, and ultimately threaten your ability to become financially successful long-term.

One of these subtle, growing threats is known as lifestyle creep, and if you want to stay on top of your financial future, you need to be aware of it.

The Hallmarks of Lifestyle Creep

Lifestyle creep sets in when your standard of living gradually improves. There’s nothing specifically wrong with this, but it can lead to the development of bad habits, problems with your budgeting, and an attitude that leads to weaker financial decisions.

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These are the hallmarks of lifestyle creep:

  • More discretionary spending. As you grow more accustomed to your lifestyle, you start to increase your purchases for more entertainment or satisfaction. Sometimes, this is due to having a higher salary, and more financial flexibility because of it. Other times, it’s purely the result of wanting more.
  • The transition from “luxury” to necessity. Another hallmark is a change in your thinking; you start to see items you once considered luxuries to be necessities. For example, you might start seeing your weekly restaurant meal not as an occasional indulgence, but as a right, and something you deserve to keep.
  • Less discerning choices. You might also find yourself making less discerning choices. For example, instead of shopping around for the best cable provider in your area, you might choose whatever option is more convenient.

Key Examples

It’s easiest to understand lifestyle creep through the lens of specific examples. When you’re young, you might treat yourself to a specialty café beverage before work on occasion as a way of rewarding yourself—as a luxury item. Over time, as you earn more income, you might start buying those drinks on a daily basis. Before long, it will become difficult, if not impossible, to summon the willpower to forgo this daily purchase.

Subscription services can also add up quickly. As you earn more money, you might be willing to sign up for more services, like fitness centers, streaming channels, or other forms of periodical content. Rather than seeing them as indulgences, or entertainment expenses, they might become “baked in” to your budget. You could consider them practical necessities even if you don’t use them that often.

How Lifestyle Creep Hurts You

Assuming you’re trying to become independently wealthy, retire early, or otherwise improve your financial position, lifestyle creep can hurt you in multiple ways:

  • Limiting your investments. The more you pool into your retirement accounts, the faster they’ll grow, and the more money you’ll have in retirement. Depending on your current age and when you plan to retire, even a small indulgence now could mean delaying your retirement or robbing you of a significant principal in the future. Compound interest is powerful, and taking advantage of it should be your priority.
  • Raising your salary requirements. Lifestyle creep is especially harmful for people nearing retirement. These individuals tend to be enjoying the peak years of their career, and are making more money than they’ve ever made before. Accordingly, they feel liberated to spend more money on just about everything. The problem is, once you’re used to this lifestyle, it’s hard to go back, but when you retire, you’ll be dealing with a much more limited income.
  • Increasing net waste. If all the extra money you spent due to lifestyle creep had a net positive value to you, it wouldn’t be as big of an issue. For example, if your purchases are increasing your net worth or if they’re resulting in positive memories, it can hardly be said that you’re “wasting” money. However, many lifestyle creep purchases do result in net waste. For example, you might be paying for subscription services you don’t use regularly, or are paying for more expensive groceries that don’t really taste better or provide better health benefits.

Fortunately, there are ways you can combat lifestyle creep, or even begin to reverse it. First, make a list of all your true necessities. Anything above and beyond these baseline necessities need to be considered as discretionary expenditures. For each purchase you make, consider whether it’s worth the loss of investment material, and whether you’d get a similar level of happiness from something less expensive. It can be hard giving up the luxury items you’ve grown used to, but it’s an important step if you’re trying to live as financially responsible as possible.

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