Understanding Lifestyle Creep
Lifestyle creep, a common financial phenomenon, occurs when an individual’s spending on non-essential items increases as their income rises, leading former luxuries to become perceived as necessities. This shift often stems from a rise in discretionary income, be it through a salary increase or cost reduction.
A defining characteristic of lifestyle creep is the mentality that spending on luxuries is a right rather than a choice, driven by a sense of entitlement. This mindset, embodied by phrases like “you deserve it,” can hinder financial progress. Combatting lifestyle creep necessitates budgeting and the ability to differentiate between wants and needs in purchase decisions.
Exploring Lifestyle Creep Further
Lifestyle creep poses risks to retirement saving and debt management by replacing frugality with excessive spending. It often starts subtly, such as splurging on a pricier dining option or unnecessary purchases, but can escalate rapidly. Factors like easy credit access and credit card use can fuel this behavior, making budgeting and discipline crucial in avoiding lifestyle creep.
Examples of lifestyle creep include daily expensive coffee purchases, upgrading flight classes, dining out frequently, excessive clothing spending, hiring housekeeping services, overspending on housing, and unnecessary large purchases like additional vehicles or early replacements.
Impact of Lifestyle Creep on Pre-Retirees
Approaching retirement, individuals are at a crossroads where lifestyle creep can present significant challenges. With surplus income and major expenses paid off, the temptation to indulge in costly purchases like luxury items, expensive trips, or additional properties can jeopardize retirement preparedness.
As retirees aim to sustain their pre-retirement lifestyle, inflated spending can strain financial resources, leading to inadequate retirement savings. Failing to save surplus income in preparation for retirement may hinder the ability to maintain desired living standards post-employment.
Impact of Lifestyle Creep on Younger Savers
Younger individuals, particularly those beginning well-paying careers, can also fall victim to lifestyle creep. A sudden influx of income may lead to increased spending on once-unattainable luxuries, impeding progress towards crucial financial goals like homeownership, debt repayment, or retirement savings. Setting clear life and financial objectives can serve as a compass in guiding spending decisions and averting this detrimental pattern.