I would argue that one of if not the biggest financial issue the majority of people will
face in their lifetime is something that is rarely every talked about in traditional financial
media.
And no, the issue is not debt, it is not the stock market crashing, it is not even something
like getting laid off from your job.
Those issues all can be very difficult to deal with, but I would argue that there is
another issue that may be even more damaging to our financial futures.
I’m talking about the phenomenon known as lifestyle creep.
Today I’m going to be talking about what lifestyle creep is, why it occurs, what issues
it can lead to if not properly managed, and how to properly manage it in our lives.
Hey everyone Daniel here and welcome to Next Level Life a channel where you can learn about
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Lifestyle creep is something that most of us experience throughout our lives to varying
degrees and it is often one of the main causes of some of those other financial issues I
mentioned a moment ago.
Lifestyle creep is defined in many ways, but for the purposes of this video, I will be
defining it as “A situation where people's lifestyle costs or standard of living improves
as their discretionary income rises.
Lifestyle creep occurs for a couple of reasons, the first is because of inflation.
Inflation, of course, is the phenomenon that explains why $1 today doesn’t buy you as
much as $1 did 30 years ago.
So an apartment for rent for $900 today, may be renting for $930 a year from now and as
a result, the cost of raising (or even maintaining) your lifestyle creeps upward over time.
The second reason lifestyle creep occurs, and the one that is less commonly talked about
is when we willingly choose to increase our standard of living by bringing more luxury
into our lives.
Often we’ll find that as lifestyle creep occurs, former luxuries soon become considered
necessities.
As a result, it can be difficult (though not impossible) to bring ourselves back to a standard
of living that we previously had after we’ve been introduced to the new, and higher, standard
of living.
And lifestyle creep can happen with just about anything.
It can happen on small things like the clothes we wear, the food we buy, or our choice of
drink at dinner to much larger things like our furniture, homes, cars, and other potentially
expenses luxuries or hobbies.
So as you can imagine, lifestyle creep is considered sinister for a few reasons, foremost
among them is that it is so very subtle.
As I said, most of us have experienced some lifestyle creep in our lives, but since it
usually happens so slowly over a long period of time that we may not notice just how much
of an effect it is having on our present financial situations or our financial futures.
Let me show you how this works.
Say John is going to school year-round, full time, and has a part-time job to try to pay
for this educational and living expenses.
He works about 20 hours a week at $12 an hour, meaning that he earns roughly $12,500.
As you can imagine he is living on an extremely tight budget.
He doesn’t own a car, he lives at home to save money, and he still can’t afford to
have many luxuries on that level of income.
Maybe he goes out to eat with friends once a month as his reward for doing so well in
school, but to save money he never goes to fancy restaurants and always orders water
for his drink since it’s usually free.
Then John graduates and gets his first full-time job, where he now makes $15 an hour.
That’s approximately $2,600 a month or $31,200 a year which to him probably feels like a
ton of money after living on $12,500 a year while in school.
Even after considering taxes he’d be doing better than before by pulling in about $2,300
a month.
And for his hard work, he rewards himself with a new, or at least new to him, car to
get to and from his job with maybe some nights out thrown in for good measure.
The car costs him $10,000, but he doesn’t have $10,000 so he has to finance it.
The 5-year loan with a 4.5% interest rate costs him a little over $185 a month.
On its own, that’s not backbreaking.
He’s got the money now after all and the busing system where he lives is not good,
so he needed some form of reliable transportation.
However, the car loan is not the only new cost that would have to be considered in his
case.
Since he didn’t have a car while in school he will now have totally new bills relating
to the gas, insurance, and potentially maintenance on the car for a start.
These costs will vary depending on a number of factors but let’s assume, just for the
sake of this example, that between all of that he is spending an additional $250 a month
on transportation costs.
But that’s not all because living at home with his parent’s, or roommates is a drag
and now that he has a job, he has the ability to get his own place so he looks around and
rents an apartment which costs him roughly $800 a month once we add in all the utilities,
insurance and other expenses associated with apartments.
Looking at his lifestyle before, John was living on a shoestring budget of $12,500 a
year or a little under $1,050 a month while in school.
He was living at home in order to save money, just as many of us did by living with multiple
roommates to save money in college and the luxury end of his lifestyle was basically
going out to dinner once a month.
Since getting out of school he has added monthly expenses of $185 for his car, $250 for other
transportation expenses, and $800 for his apartment for a total monthly budget of about
$2,285 on a $2,300 after-tax income.
In other words, John has officially entered the rat race and is living paycheck to paycheck.
And mind you, his standard of living hasn’t really even gone up that much, no seriously,
because he has a total of $15 a month or $0.50 a day to actually go out and enjoy life after
covering his expenses.
That isn’t going to get you much nowadays.
Sure he’s living on his own, and I don’t know maybe his parents were cramping his style,
so that’s certainly changed.
He’s able to drive now, except not really because he can’t afford the gas and extra
wear and tear on his car that, that would create without plunging himself in even deeper
debt and living on an even tighter budget down the road.
So maybe not that, but maybe he’s able to go out to dinner twice a month now instead
of once a month.
But that’s about it as far as improved standard of living goes.
And that’s an unfortunate reality that many Americans are facing today, they’ve worked
hard, put themselves through school (if they’re lucky it’ll have been done debt-free like
John managed to do but statistically speaking that isn’t usually the case), they get their
job (hopefully), and a couple of expenses (sometimes even the necessary ones) increase
but they increase beyond what’s necessary like we saw in John’s case and suddenly
they’re living paycheck to paycheck.
So what’s the solution?
One might think that his future raises will enable him to escape the rat race and that
might be true depending on what career he choose and how well he does, but if he’s
in a career that only gets him 3%-4% raises each year, it’s going to be quite a while
before that happens (especially when we consider that inflation has averaged about 2%-3% per
year historically) and eventually he’ll be hard pressed to save enough money for his
eventual retirement.
The solution, as I hinted at in past videos is that we need to learn how to properly manage
lifestyle creep.
Because, contrary to what it might seem like so far, I don’t believe that lifestyle creep
is inherently a bad thing.
It, like most things in life, is fine so long as it isn’t used in excess.
Cars are not bad, too much car is bad.
Extravagant vacations are perfectly fine, but too much too soon can be damaging to your
financial present and future.
There’s nothing wrong with lifestyle creep, but too much of it is dangerous.
Like I said in last week’s video, it isn’t really about how much you make or even about
how much you spend, it the difference between the two that matters.
So how could John have better managed his lifestyle creep from before?
Well, as always he has several options at his disposal.
First, he could’ve spaced out his lifestyle creep instead of trying to take it on all
at once.
Assuming he wasn’t able to carpool with someone, take advantage of some other form
of ride sharing, or bike to and from work for a little bit in order to save up money
for better transportation he could’ve stayed at home for a little while longer in order
to pay off his car loan.
Judging by the numbers from the previous example he would’ve had $1,050 a month in living
expenses due to living at home plus the $185 car payment and the $250 for other associated
transportation costs for a total monthly expense of $1,485.
This means that he would’ve had about $815 a month to put toward that car loan and would
have it paid off, in full, in 11 months and he would’ve saved about $1,000 in interest
over that time as well which is a nice bonus.
Another thing he could’ve done was find some roommates that were willing to rent an
apartment near his work which would lower the cost of John’s transportation costs,
if not eliminating them altogether and help save him some money on rent.
Say if John found an apartment within biking distance of his work and got two roommates.
The total cost of the apartment was $1,500 a month with utilities and the three split
the costs evenly.
That means John is paying $500 a month for housing and, beyond possibly the initial purchase
of a bike if he didn’t have one, or any costs that may be associated with a bike ride
sharing program he transportation costs would be virtually nothing.
This would leave John with monthly expenses somewhere in the neighborhood of $1,550 a
month, meaning he would have $750 a month left over after taxes and expenses in order
to invest for his future and have fun.
Say if John wanted to retire at 65 and was 23 after graduating college.
He wanted to live on $24,000 a year in today’s dollars when he retires.
Assuming a 3% rate of inflation that means his retirement nest egg would have to be about
$2,075,000 once he’s 65 if we’re following the 4% rule.
At an 8% average annual rate of return, John would need to invest about $550 a month in
order to reach his goal.
Yet another thing John could do is to start a side hustle to bring in a little extra money.
Say John starts flipping things that he finds in his local discount stores for a profit
online which allows him to take home an extra $500 a month on average.
Assuming that John still went and financed his car as well as moving out on his own he
would at least have some breathing room this time thanks to his $2,800 a month take home
pay compared to his $2,285 a month in expenses.
He could, as I suggested in last week’s video play his financial strategy both offensively
and defensively by rent hacking with the help of his roommates and starting his e-commerce
side hustle.
This would end up giving him $1,250 a month left over after taxes and expenses to put
towards his investments and his current enjoyment.
Assuming his investment goals stayed the same, he would have roughly $700 left a month to
let his lifestyle creep up a little without derailing his present or future financial
situations.
Maybe he can start going out to dinner once a week with family and friends and get something
other than water with his meal.
Maybe he could go to the movies, on vacation, or take part in some recreational activities
like rock climbing or zip lining.
Maybe a bit of both or he could decide to put a little extra toward his investments.
This would give him the possibility of becoming financially independent earlier in life than
normal without sacrificing his current happiness, not to mention that over time those investments
would gain interest which would give him some small form of security in case something unfortunate
happens with his living situation, job or side hustle.
Another thing that I feel John, could and should do in any of these scenarios is to
consciously pay attention to figuring out what he truly enjoys spending money on in
life because as time goes along he may find some things that he is currently spending
money on just don’t bring him that much enjoyment and he can then start trying to
figure out how to reduce or eliminate those expenses, essentially reversing lifestyle
creep!
And those are just a few examples of what John could do to better manage his lifestyle
creep, but it’s by no means an exhaustive list, so here’s where you come in.
In the comments section below I want you to leave some examples of where you have experienced
lifestyle creep and how you can (or did as the case may be) manage it.
I’m looking forward to seeing your examples and ideas.
But that'll do it for me today once again if you enjoyed this video be sure to smash
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