One way many places counsel on saving money is to avoid lifestyle creep (lifestyle inflation or the Hedonic Treadmill). Recently I clicked on a video in my feed, I don’t remember the title or who it was by, and it mentioned lifestyle creep as a good thing. My gut reaction was that lifestyle creep was bad and the video was full of it. However, upon reflection, I realized that it might not be a bad thing, depending on where you are in your financial journey. I thought this week we’d discuss lifestyle creep when I think it’s bad, when it can be good, and some strategies to avoid it.
Yes, I know the title is kind of clickbaity. I thought it was clever so I’m sticking with it anyway.
What is Lifestyle Creep? Plus Some Caveats
Before we can discuss the topic we have to know what it is. In short, lifestyle creep is the increase in spending, usually, this increase corresponds to an increase in income. As you get raises you buy a nicer car, a bigger house, go out to eat more often, or whatever else people spend money on.
One thing of note is that the inverse, lifestyle deflation is much harder to achieve than lifestyle inflation. You notice things you’re going without more than you notice the thing you started buying over time.
I’m going to give some examples throughout to try and give some examples. There is one big assumption I’m making with all of these, the increase in spending is on wants and not needs. Lifestyle inflation isn’t putting food on the table every night, it’s going to a restaurant every night to buy a fancy meal when you used to cook at home.
Is Lifestyle Creep Good?
Now to the million-dollar question. Is lifestyle creep a good thing or a bad thing? I think it depends on your financial goals and time horizon. To start, let’s look at the situations where I, a random engineer and Militant Cheapskate, think it’s a good thing.
If you don’t plan to retire until your early to mid-60s, like most Americans, I think a little bit of lifestyle creep is perfectly acceptable, as long as you’re balancing things with your future savings. I think it’s fine to take some percentage of a raise, based on your time horizon and financial goals, and spend that on nice things.
Even better if those nice things you buy are experiences or something else that have real value. If you’re a car person, go ahead and get that project car or dream car of yours. Just make sure that the money pit of a project car you buy isn’t going to take up more of that raise than saving towards your financial goals. Just keep in mind the tradeoff of not saving that money is staying in the workforce longer or not being able to spend that money elsewhere.
Another time I think some lifestyle creep, albeit with some massive caveats, is okay is if you’ve already met or exceeded your financial goals. I think this is more useful for people who are savers. For instance, say your goal was CoastFIRE and you’ve reached that amount. We’ll also assume your plan, adjusted for inflation, is to withdraw more than your current spending. You plan to spend $4,000 a month from your portfolio but currently, you only spend $2,000. I think if you were to start spending closer to your after-retirement budget from your job income it wouldn’t be that bad. It could be a good way to get used to the spending you’re anticipating in retirement before you’re actually retired. Assuming you want to earn that much, it would be perfectly fine. As long as you’re not exceeding what your invested assets will be able to pay and the increased spending is meaningful to you.
Let’s also look at if you exceed your financial goals. Let’s say you have saved an extremely large nest egg. To meet your safe withdrawal rate you want to go with 4% and let’s say to continue your current lifestyle would be a withdrawal rate of 2%. You wouldn’t see me complain about someone bumping up their withdrawal rate higher and living a little better, as long as they remain reasonable, consider if they’re okay with a higher withdrawal rate, and if the increased spending is meaningful.
All in all, I think lifestyle creep to find the amount that is enough spending for you is a good thing or if it has meaning to you even if you already have “enough.” Assuming it doesn’t interfere with your financial goals. The big thing I want to stress is that this increase in spending should be on meaningful things.
When is it bad?
Now that we’ve looked at some cases where it’s bad. Most of them are the caveats I gave above being taken to the extreme.
I think the most detrimental situation is when it either starts to interfere with your financial goals. To use the initial example from above again. You’re an average American who plans to retire in their early to mid-60s and just received a raise. Instead of putting aside some portion of that raise, depending on your time horizon and financial goals, you put all of it towards increased spending. Say you use to start buying fancy teas every month and these teas you’re buying are taking up the entirety of that raise. If you’re doing things like this with every raise instead of saving some portion of each increase in income that you receive, your initial savings amount may not be enough to support your long-term financial goals, like retirement especially if the goal is to continue this increased spending.
To once again piggyback off of the other two examples for when I think a little bit of lifestyle creep is okay, I think it can get in the way of your FIRE aspirations or a sustainable withdrawal rate. If you increase your spending too much, your portfolio could extend past a sustainable point. Say you spend $4,000 a month because of lifestyle creep but your portfolio would only support $2,000 a month with metrics like the 4% rule. I haven’t seen anyone calling for an 8% withdrawal rate for a long retirement. Although in that case, I’d argue you hadn’t planned for enough in retirement not that you let lifestyle creep eat it away.
One that doesn’t piggyback on the others is when it makes you take on more risk than you’re comfortable with. Now some people may be perfectly happy with an all-stock portfolio or something with even more risk (like concentrated positions). That’s perfectly fine, find the risk tolerance that works for you and helps you reach your goals. But if lifestyle creep makes it so that you need to take on more risk to meet your financial goals, say go from A 60/40 portfolio to an 80/20 portfolio where the volatility of the latter will keep you up all night, I think it’s bad. If you’re dead set on retiring by age 35 or earlier like a certain engineer but lifestyle creep is pushing that date or forcing you to take on more risk than you’re comfortable with, it’s a problem.
This is nothing to say when lifestyle inflation starts to border on needing insane returns to meet your goals. For instance, if you need 100% yearly returns to meet your goals you either need to adjust your time horizon or adjust the number.
All in all, if it interferes with your financial goals both now and in the future, I think lifestyle creep is bad.
Is your Spending Enough?
All of these examples I had thought of led me to one problem though. If you’re spending more money on something and that something is meaningful to you, was the initial amount “enough” to begin with? I subscribe to the philosophy that there is such a thing as enough income a month to allow you or your family to live your desired lifestyle without needing ever larger amounts of money, excluding the effects of inflation.
It’s the central thesis of FIRE, that there is some amount of money that can sustain and fulfill you. I’d argue that if you’re increasing your spending because of raises then you weren’t really at a number for enough. My plan has some wiggle room built in just to be safe in case my life circumstances change, but anything beyond that I plan to donate rather than spend on myself, the extra cash won’t be doing anything for me.
I’m not a car person, so I think it makes a great example. In an ideal world, my current car will last me until the day I no longer need it. However, I know that at some point, the maintenance and repair costs are going to eclipse the price of a new car and it’ll be time to replace it. I plan to find a very similar car, just a hybrid (we’ll see if a fully electric car can meet my needs by then), that gets good gas mileage and has more modern safety features. I’ll then drive that car into the ground just like I plan to do with my current vehicle.
If I had twice as much money would I buy a nicer car or upgrade more frequently? Probably not, the car I have is enough for my needs. I don’t care to drive so having fancy seat warmers or whatever fancy features I can get on top of a car that can safely go from A to B for a cheap price aren’t necessary for me.
Although my mom’s car has seat warmers and let me tell you, I do like those in the winter. It is tempting at times. If the car I upgrade to happens to have seat warmers it’s just a bonus. Although with the distances I drive on average, it probably would barely get warm before I was at my destination. Maybe if I start driving more.
Strategies to Avoid Lifestyle Creep
Of course, I actively avoid lifestyle creep. My financial goals require me to have enough money to be able to spend $4,000 a month sometime in my early 30s (35 at the latest) based solely on my portfolio at a 3.5% withdrawal rate. To reach these goals I can’t have much in the way of lifestyle creep without increasing either my risk exposure or time horizon. So how do I avoid it, and is avoiding lifestyle creep the answer?
In my opinion, an ounce of prevention is worth a pound of cure. If you can prevent lifestyle inflation from happening to begin with you don’t have to cut back down the road. If you can automate away all of the extra funds from a raise you don’t have to worry about spending it, you’ll never see it. Of course, this is from the guy who doesn’t automate ~50% of what he saves each month (although I do have a system that makes it simple to set money aside for such things).
To put an example on how I put this into how I apply this. My phone suits my needs, it makes calls, covers my internet needs at home, and allows me to at least draft most of these posts. But I don’t upgrade it every year. I run my phones until they start having problems that impede the operation that I need, usually about every 2-4 years. Would having a better camera be nice? I guess, but the one I have suits my needs. Even if they come out with a phone that has a camera that’s 10 times better than mine, that’s great, but it won’t be enough to upgrade. If they could do that every year you still wouldn’t see me upgrading yearly.
Of course, prevention may not be enough, sometimes you need to be able to track and catch lifestyle creep as it comes, which brings us to the next method.
Budget, budget, budget. Without data, you can’t even quantify how your spending is changing. I have goals for each of the categories that I spend in and I try to update these goals yearly. Data will be your first line of defense, you can’t easily see where your lifestyle has inflated to try and nip it in the bud if you don’t have the data to see it. If I notice that my groceries are suddenly $50 higher month after month, it’ll be time to take a look at why that change has happened and if it’s okay with me. However, sometimes you don’t notice the lifestyle creep until you’ve gotten used to it.
You might be taking those raises you’ve gotten over the years and using them to buy nicer things, say that car with the seat warmers. Now that you’ve noticed that it’s starting to interfere with your financial goals. It’ll now be time to downsize and deflate your lifestyle or reassess your financial goals. It may be time to sell that car with a set of seat warmers and buy a cheaper vehicle or stop buying as many of those fancy teas.
It’s often said that lifestyle deflation is harder than lifestyle inflation since you’ll notice that those nice things you got used to are gone. I couldn’t find anything to confirm that with a quick Google search (all I got were other FIRE blogs and some weird news sites I’ve never heard of), I’ve just seen it written about elsewhere. Others may use a different term to describe lifestyle deflation and that’s why I came up with nothing. Anecdotally I would be inclined to agree that lifestyle deflation is difficult, but I think it’s only difficult for the short term like building a habit to workout regularly.
An Aside on Lifestyle Deflation
Now I know, just above I said lifestyle deflation is a strategy to deal with lifestyle creep to help bring things back into focus and bring yourself back on track to meet your goals. I do think lifestyle deflation can be bad if taken to the extreme. Cutting back from eating out every night is good. But for you, as an individual, this cutting back may be that you only eat out once a week, maybe it becomes date night with your partner or something. If you then take that a step further and stop eating out at all, without replacing whatever made it meaningful in some more frugal way, it then isn’t good. Instead, I’d reevaluate your financial goals, either the amount or the timeline. Try to balance cutting back without cutting back too far.
To put it simply, you should be aiming to spend enough now and save enough to be able to support your spending when you retire, be that early retirement or a more traditional retirement. Is retiring at 30 better than retiring at 31 if you’re missing out on experiences that would be meaningful to you on the way?
After all of that, let’s wrap it up. All in all, I think as long as it doesn’t get in the way of your financial goals and you haven’t reached the number that’s “enough” for you then maybe you should expand your spending a little to spend on things that are meaningful to you, maybe it’s seat warmers on a car or a year-long sabbatical. Just make sure that before you increase spending due to your most recent raise, take a look at your financial goals and how meaningful the increase in spending is to you before you decide how much to spend.
I’d prefer to take the raise I get and use it to decrease the time it takes for me to reach my financial goals. I’m happy with where I’m at. That may not be the case for you, and that’s okay. There are many roads to Rome, after all.