Lifesytle creep or inflation

Lifestyle creep is almost interchangeable with the term Lifestyle inflation. They really mean almost the exact, if not the same thing. What it means is that when someone makes more money or their income increases on a recurring basis or over time, or they make a one time windfall, what they do is spend that extra money on stuff, experiences, often meaningless material items, or whatever. Or their “taste” increases, and they think/demand only high quality, perfect “stuff”. The concept is often times referred to as “Keeping up with the Jones” or being in the “Rat race”.

Not matter what you call it, lifestyle creep is really the American way for the vast majority of people. They just spend and spend, go into debt, and live on the edge. This is proven by the miniscule savings rate of 2.5%, record credit card debt, delinquent car loans, and other data points even though the job market is booming. However for those who make a conscious decision, and have the self-discipline/control to not give in to lifestyle creep, that is when you can really start to get ahead, hit your financial goals or build wealth and get out of the rate race. Maybe even join the FIRE community.

Examples of lifestyle inflation/creep

Let me give an example of Lifestyle creep to help you visualize it. Let’s say a married family is currently making 75,000 per year, and saving 3% of that pre-tax, or $2250 per year. Note the 3% rate is right around the average savings rate in the United States, but it may be even on the higher end according to some data points including from Bankrate. They are paying their bills off the 75K of income, taking an annual vacation, etc. The family may very well be happy in what they have and what they are accomplishing in life, including financially, emotionally, and socially.

Now lets say the wife gets a raise and the household income goes up to $90,000 per year, which is a 15K pre-tax raise. At the $75,000 per year rate the family was getting by, paying the bills, living life and doing well. They were saving a little money each year, and they were mostly happy.

Now they have an extra 15K in pre-tax income. Instead of keeping their expenses at the same 75K level (or close to it) they start spending more money each month. Maybe they see their neighbors who have “more” (whatever that means) or they read articles about people, monitor facebook feeds, or watch TV and see flashy material items or people having experiences. So the family says to themselves “Hey, we are making more money, lets buy that fancy car” or “take that trip” like their neighbor or they may see on some Facebook feed.

So in an effort to “prove themselves“ to people they do not know, to try to show an image to people who do not care about them, and “keep up with the jones”, the family maybe buys a car with a higher monthly payment, start to eat at nicer restaurants or go out more often, buy a new home with a higher recurring monthly mortgage payment, take on debt for new expensive jewelry, splurge on a vacation they can’t afford, or whatever. The family now “gets use” to living on the 90K per year from a combination of (1) higher monthly bills they are obligated to pay and (2) more one time, recurring luxury items or splurges.

The fact is the lifestyle creep means that with their higher income, instead of doing something that would be smart like investing some or all of the extra cash from the raise (and using the money to work for them such as creating a dividend stream or some other investment) they take all the extra income and spend it. Or they could have done something smart like maybe investing a good chuck of the extra income and splurging with some of the extra income…but not all of it.

This is what Lifestyle creep is. It is when your income goes up, and you just spend the money instead of saving, investing it (so the money works for you) and living smartly. There are always people with more stuff, and the truth is many of them do not even own it as they took on debt to get it or they are living on the edge.

Even if the family had an income of $100,000, someone else is making 110K. If the family was making 120K, someone else will have 130K. Even if they had $50 million, someone else will have 60 million. The fact is there is someone who will always have more, and Lifestlye creep and keep up with the Jones is taking your higher income and spending it. It is a rat race that you can’t win, and entering it prevents families from saving, meeting their financial goals, and it often puts people on “the edge” if something goes wrong. It is not paying yourself first, as we stressed yesterday.

I know many people, including family members, who present “fake images of success”. They live on the financial edge due to Lifestyle creep and other factors and try to create a fake image of themselves. I even had a family member who lived a block from Central park in NYC, had a financial hiccup (job loss), and was evicted from his pricey apartment within weeks. Some are borrowing money from my mom (not repaying it and denying it was a loan so in effect stealing).

Now, there are some people who can afford to spend the extra money on vacations, homes, meals, or whatever. So they can splurge, and if they can, then they should. But the fact is many people try to show off and get caught up in Lifestyle inflation, and we at needhelppayingbills are believers in that the truly fortunate or wealthy do not feel the feed to show off. They try to operate behind the scenes, do not talk constantly about money, care less what people think about them, and try to give back and be generous. We always recommend get out of the rat race!

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