How to fend off ‘lifestyle creep’ as you start to make more money

Whenever the word “creep” is associated with anything, the connotation usually isn’t good. There are the obvious associations of the word related to people who annoy us or behave in a creepy way. But what about its true meaning?

The word creep actually means to move slowly or stealthily. Something can creep up on you and you won’t have even seen it coming, or maybe you noticed it but it was already too close for you to do anything about it. The “it” in this case is “lifestyle creep.”

Lifestyle creep is a peculiar phenomenon. Let’s say you’re living your life in a certain way and fortune befalls you. Maybe you get a raise,  receive an inheritance, or finally pay off your mortgage. In each of those scenarios, your cash flow increases and without even realizing it, you may start to match that with a change in lifestyle – you buy more, travel more and generally spend more. Lifestyle creep refers to a gradual and almost stealthy shift to a more luxurious standard of living as your financial standing improves.

The problem is, if both your cash flow and expenses rise simultaneously, you may find yourself incurring new debt on purchases that you don’t need or use. That extra money you thought you’d have has somehow been eaten up by a more expensive lifestyle.

Is lifestyle creep inevitable? 

But does everyone who gets a raise fall into the same trap? “It’s not necessarily inevitable, but it is extremely common,” says Ed Rempel, a Toronto-based fee-for-service financial planner and tax accountant. “I think for most people it just happens naturally. As your salary increases, or as life goes on, you find more things to spend your money on, or more things that you enjoy.”

More than acquiring stuff or taking more trips, Rempel sees many clients who, after they receive raises or somehow find themselves with more money, can’t really identify where that extra money went at the end of the year. “It’s surprising how often that happens,” he stresses. “It just kind of disappears.”

An even bigger problem, he notes, is the expectation lifestyle creep creates for retirement. If people change and/or increase their lifestyle today, they will certainly want to keep it at that same level in their retirement years. Lifestyle creep can happen at any age and at any point of your career, but the younger you are when it strikes, the harder it will be to make changes later on.

Lifestyle creep can happen at any age and at any point of your career

For example, younger workers have less experience with spending and saving and may not be making the right choices for the future, especially if they’re making a high salary. “It’s a learning process,” says Rempel. “In your 20s you’re kind of figuring out what you want to spend your money on. When you are into your 30s and 40s you’ve usually settled into a lifestyle.”

He uses pro-athletes as an example: They have high salaries at a young age and have to consider and/or change their lifestyle once their careers end. 

Among older people, a paid-off mortgage can have a similar effect. If you pay off your mortgage 10 years earlier than you expected to — and before you retire— you can live a mortgage-free lifestyle while you’re still working and earning an income. But after retirement, when you’re earning less, it’s difficult to start budgeting with less money. 

“That’s the big thing with cash flow and lifestyle creep,” he says. “If you’ve gotten used to certain things, it’s always hard to cut back.” So, rather than living high on the hog during those mortgage-free years, Rempel suggests reviewing your finances and retirement plan and see how much money you’ll need in the future.

How to avoid lifestyle creep

When you receive a financial windfall of some sort, be it a raise or an inheritance, it’s crucial that you make a “conscious decision” of what to do with it, says Rempel.

Because the word “budget” can frighten people, it often helps to first just be conscious of your spending and understand where that extra money is going. The next step is to understand where you want that money to go. In what areas would you like to be able to spend more and in what areas do you think you could stand to spend a little less? Think of this as a budget for non-budget-minded people.

As your salary increases, or as life goes on, you find more things to spend your money on

In order to avoid being caught off guard by lifestyle creep, Rempel points to the tried-and-true method of paying yourself first. You’ll have to figure out, through budgeting or future casting, how much money you’ll need in the future and how much you have to save today in order to secure that future.

“The advantage of doing that,” says Rempel, “is that you can spend the rest of your money without guilt.” 

Ultimately, a fully fleshed out, long-term financial plan is necessary in order to avoid falling prey to lifestyle creep. And if you can beat the creep, it will help you save money in the long run.

“The vast majority of Canadians are way behind,” says Rempel. “If they are trying to just maintain the lifestyle they have now after they retire, the amount they’ve saved isn’t even close to enough. So if you have that plan it makes a big difference.”