What is “lifestyle creep” and how could it affect your finances?
06/12/2023As your income increases over time, you may find yourself exposed to "lifestyle creep". Find out what this means for your wealth, and how advice can help
As you progress throughout your career, the most common trajectory is that you earn more over time as you gain experience and seniority in your role.
Then, when you reach retirement, your income typically drops as you finally finish working, and you live on the savings you’ve set aside throughout your working life.
There will no doubt be pitfalls and roadblocks on the way that disrupt your progress on this track. Whether it’s redundancy or missing out on an opportunity that could have boosted your earnings, you’ll face some setbacks that are completely out of your control.
However, a phenomenon that could affect you – and is actually completely within your control – is one called “lifestyle creep”. This is a sequence that’s easy to fall into, but tricky to contend with if you do, and could have a notable impact on your long-term financial sustainability.
So, read on to discover what lifestyle creep is, how it can affect your ability to save for the future, and what you can do to combat it.
Lifestyle creep sees your outgoings increase with your earnings
Lifestyle creep is a common pattern that many people fall into of increasing their spending as they increase their income.
A good way to understand lifestyle creep practically is to think about the type of wine you might buy at different stages of your career.
When you’re right at the start of your working life, perhaps aged between 20 and 30, you might choose to buy a £10 bottle of wine. It probably isn’t the best tasting bottle on the shelf, but it’s affordable for where you are right now.
However, by the time you turn 35, you might have had a couple of pay increases. In turn, you may have decided to start buying more expensive wine now that you can afford it. Instead of a £10 bottle, you might instead choose to spend £15 or even £20.
Extrapolating this further, when you reach a level of seniority and are perhaps approaching your peak earnings, you might have a taste for the finer things, and regularly spend £50 a bottle.
This is exactly how lifestyle creep works. The more you earn, the more comfortable you are spending your money, and so your expenditure increases alongside your income.
Without checking your behaviour and allowing your lifestyle to creep up on you, you might suddenly find yourself either running out of money, or having to significantly change your lifestyle.
For example, while going from a £10 bottle of wine to a £50 one might not be that much of a change in isolation, it’s still an increase of 500% in expenditure. So, you can imagine how significant this much of an uptick would be if it applied across your spending.
Saving for the future means you need an income-over-expenditure surplus
Lifestyle creep isn’t necessarily a problem on its own. Understandably, you’ll want to use your earnings increases to make improvements to your lifestyle, whether that’s big things such as the home you live in and the holidays you go on, or small things such as the wine you drink.
However, one of the major stumbling blocks that a creeping lifestyle can create is affecting your ability to save for the future. That’s because you need a surplus in your income over your expenditure to do so effectively.
For example, if your lifestyle accounts for 95% of your income at the start of your career, you’ll only be able to set aside just 5% of it for later life. This might feel like enough at this stage.
But, just 10 years later when you start to consider your future more seriously, you may want to save more. Yet, if you’ve continued to increase your lifestyle spending so that it’s still 95% of your income or even more, you’ll still only be able to put a fraction of your wealth towards pensions, investments, and savings.
In turn, if you want to save more, that means you’ll have to give something up to invest for your future.
This can be incredibly difficult. Increasing your lifestyle might be easy, because going from a cheap wine to a more expensive, nicer bottle is no problem. But going the other way is a huge challenge, downgrading what you’d previously been enjoying.
As a result, the risk of your creeping lifestyle is that it could cost you in later life and retirement when your income typically falls.
Financial planning can help you reward yourself while saving towards the future
Combatting lifestyle creep can be a challenge. As you earn more, whether that’s from pay increases, bonuses, or even from your investments, the temptation is to enjoy that wealth.
However, as you do so, it’s also crucial to continually build towards later life, as part of a wider financial plan based on long-term sustainability.
This is where a financial planning approach can help you make sensible decisions. At Douglas White Financial Planning (DWFP), we advocate enjoying a part of the success you achieve, while also using it to provide for you and your family in the future.
For example, imagine you’re paid a £1,000 bonus. We might suggest redirecting a portion of perhaps 30-60% of that into your ISA, pension, or wherever else you save for later life. Then, reward yourself by using the rest of it however you’d like.
There are two key benefits to this. Firstly, it means you can enjoy part of the increase or bonus, safe in the knowledge that the rest of it has gone towards your future.
Secondly, and perhaps more importantly, building habits like this can ease the pressure when you want to increase your savings later down the line.
Imagine that you’re in a review with us, and you’ve decided that you want to save more into your pension. We might suggest increasing savings from £2,500 to £3,000 a month, which can feel far more manageable if you already have a regular savings habit.
That’s opposed to you deciding that you want to go from saving £30,000 a year up to £36,000, which can feel far more daunting.
Having a plan in place means that when your lifestyle increases in cost alongside your earnings, you’ll be able to keep saving over time without feeling the squeeze on your finances that you might if you’ve allowed your lifestyle to creep.
Get in touch
Need help building financial habits and a plan that works for you throughout the course of your career? Speak to us at DWFP.
Email info@douglaswhiteltd.com or call 0151 345 6828 to get in touch today.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
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