How lifestyle creep can derail your financial plans

Know your situation and upgrade with intention to minimise mindless spending

Lifestyle creep is one reason why some people who appear to earn large incomes still live pay cheque to pay cheque. Alamy
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Lifestyle creep is everywhere. As the phrase suggests, this means that when your income increases or your portfolio grows, your spending also increases.

A nicer car, that fashionable watch, upgraded holidays. What were once luxuries become affordable and the affordable becomes must-haves.

Lifestyle creep is one reason why some people who appear to earn very large incomes still live pay cheque to pay cheque.

Some call it “moving the goalposts” because once we reach a particular milestone in our lives, we then push our wants even further.

A recent study by financial services company Schwab reveals that more than one third of those polled confessed to spending more than they could afford.

They also admitted that their spending was often influenced by their friends’ images or experiences shared on social media.

Lifestyle creep has big consequences. First, it diminishes the joy we feel when we get to the next level. You’ve worked hard for that raise or bonus and invested wisely to grow your portfolio.

But it’s hard to savour those accomplishments when you’ve quickly moved on to the next thing.

A second cost is that it sets us up for a lifetime of always chasing the next thing, what psychologists refer to as the “hedonic treadmill”.

As the financial writer Morgan Housel observes in The Psychology of Money, the hardest financial skill is getting the goalposts to stop moving.

Let’s look at a couple of important factors.

Firstly, many people will choose to add, instead of subtract. Why? Because our minds tend to add before taking away. Subtraction feels less satisfying because our instinct is to grow and build. It’s hard to resist more.

The second factor is social comparison. This is deeply wired into who we are. We humans have always closely looked at what others around us are doing. We frequently imitate others, especially when we admire or envy them.

And in the era of social media? This impulse has been triggered more than ever.

Moving the goalposts, it seems, is very natural. So, what can be done about lifestyle creep? There are plenty of strategies.

First, know your situation. Having a clear grasp on your finances is not easy, but once we do, we can begin to answer a basic question: Can I afford it?

Be aware here that expenses are harder to spot when they involve lots of smaller regular payments such as membership fees, leases or maintenance costs – versus one very large purchase.

But ensuring we have clarity here means we can communicate better with our partners and families and make better decisions.

Second, upgrade with intention.

Upgrades, indulgences and just having fun are good things. A big reason we accumulate wealth is to do the things that we want to do.

Perhaps, though, we can be a bit more deliberate in our spending. Having a sense of where the latest upgrade fits into your official financial plan begs the question: Do you have a written-down financial plan? Most people don’t.

For those who do, we can easily think about how a raise, bonus or windfall fits into our long-term objectives and dreams. If the luxury holiday or lavish new car fits into the plan, go for it. If not, give it a second thought.

Third, check in on your values.

So much of success in our money lives is anchored on knowing what’s truly important to us. When our money is aligned with our values, true wealth is much more achievable.

We should ask ourselves: Is moving the goalposts further out about keeping up with the Joneses? Or is it in sync with the way you want to live your life and model your values?

Next: Pause. In these noisy times, it’s often hard to stop, breathe and reflect on what we have, need, and want.

Research suggests that a source of unhappiness among the rich is that the ability to afford almost anything makes it harder to savour the things they already have.

We can also recognise and even appreciate that the discipline of not spending, even when we can afford it, can be a meaningful exercise.

Lastly, be clever. With your partner or your financial adviser, find ways to understand where lifestyle creep happens and then identify some tactics to avoid or minimise it.

Perhaps you can commit before you’ve obtained a bonus or windfall that you will put a certain percentage aside and then indulge with the balance. Maybe you can tweak your savings rate. The devil is in the details.

Lifestyle creep can undermine our attempts to lead a wealthy life. While we can accept that the push for more is natural, there are many ways to address it.

Sam Instone is co-chief executive of wealth management company AES

Updated: October 02, 2023, 4:31 AM