Lifestyle Creep - why people are stuck in jobs they hate

Why does lifestyle creep matter?

Folks agonize over negotiating pay or maximizing their returns by a couple % points. But the real wealth killer? Lifestyle creep: when an increase in income leads to a rise in spending, expenses, and an elevated standard of living that can prevent financial growth. It sounds like "I'm working so hard, don't I deserve [insert expensive item here]?". If you're finally getting a piece of the American Dream that your family has always strived for, I especially empathize.

But here's the risk: spending like this can become a ball and chain to the wrong job. Keeping lifestyle creep at bay gives you (a) the opportunity to walk away from a job you don't enjoy and (b) accelerates your path to financial freedom, the promised land where work becomes optional.

How do I spot if my lifestyle is creeping?

A) If you're qualitative:

No one sets out to overspend! It sounds more like "I earned this raise, so I earned this reward” or “I work hard, so I deserve to play even harder". If that's been your mental script recently, this might be worth exploring.

B) If you're quantitative:  

‍I look out for the 2 key canaries in the coal mine:

1) Housing is most people's highest expense, so I look out for when housing costs have crept past 25-30% of your net income.

2) I also look out for when savings are under 20% of your pre-tax income. That's a sign that your lifestyle spending may be growing faster than you'd like it too. 

Start with why: what causes lifestyle creep?

Even among high-earning clients ($250-500K+ in income), when we asked folks to name their number one financial challenge, nearly half answered it was cash flow and not being able to save enough. I love the chart below from Financial Samurai on "how to make $500,000" a year and still feel average. We help our clients generate a similar cash flow chart for themselves (as their household CFO), and some jokingly call this their "Where the F's the money!" chart.

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A blog post from the Collaborative Fund, uses a good analogy to describe lifestyle creep: say you work out an hour each day, 7 days a week, for a whole year.... but each night you eat twice as much for dinner (plus dessert obviously) as a reward for working out so much. You'll most likely find that at the end of the year, you've made no progress towards losing weight. Why? Because you overestimated how many calories you lost from working out while eating twice as much as you usually do. You thought you could afford the extra calories when in reality, you couldn't...

Sound familiar? Yup, sounds a lot like lifestyle creep. You overestimate how much your extra income impacts your wealth and end up spending twice as much as you usually do, leading to you not growing your wealth like you had hoped to.

What's the root cause of lifestyle creep?

The drivers are multifold:

(a) Significant student debt—the price of admission to a high-income career—which leads to starting out deep in the red

(b) Early working years overlapping with major financial burdens, like first home purchases and having children 

(c) "Lumpy" pay, when a high % of pay comes from a bonus or equity payments, which makes it tricky to commit to a savings program 

(d) "Emotional spending" for folks who feel that they owe themselves splurges for their demanding work schedules

(e) "Keeping up with the Joneses" propagated by a company's "work hard, play hard" culture and a constant comparison to their peers

(f) Forced early retirement in careers like consulting and law that are "up and out", which dials up the pressure for their limited working years

What to do about it: what are strategies for stopping lifestyle creep?

A. Start with a mindset shift: your money can earn more for you than you can.

As the child of immigrants, I was raised with the mentality of "keep your head down and WORK". That meant tunnel vision on working hard, earning that next raise, and at the extreme: "no pain, no gain". But the numbers show that your money can earn more than you can over your lifetime.

In order for your money to earn for you (...and to earn even more than you’re currently making at your job), you have to invest. And in order to invest, you have to not spend it all today. I'm not suggesting an extreme of living like a monk, or even going full-on FIRE and living on ramen. I'm suggesting you "pay" your future self so they can live the American Dream too. You can do that by starting to...

B. Reverse Budget to enjoy "guilt-free" spending.

Looking over your shoulder to nickel-and-dime every purchase is a quick way to feel miserable. Few people stick with apps like Mint for that reason. Instead, pay your future self first. 

How? Automatically deposit a part of your paycheck each month in long-term investments. You'll have a "set-it-and-forget-it" way to ensure you're not overspending. Think of it like filling your plate with veggies so there's less room for dessert.

Steward can personally help you calculate how much to invest each month vs. keep in cash, and where to invest in a tax-optimized way here.

C. Focus on the big rocks of spending that matter.

-This means forget about budgeting lattes. Waste of mental energy. 

- Housing is most people's highest expense, and in my past-life as a white-glove advisor to ultra-high-net-worth families, I spent a lot of time helping wealthy people unwind their real estate. Avoid their mistake and be judicious when selecting where you live so that rent or housing costs don't creep above ~28% of your pre-tax income. 

- In other words, as “above average” earners, I encourage you to be “above average” on reigning in your housing spend as well (you can see averages in this chart below). 

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D. Last resort, look at your spending last year in three ways:

(1) The Values Approach: 
- List out your 3-5 core values.
- Try to tie up your major spending categories to one of your core values (e.g., family, education, etc.).
- Were there any spots where spending didn't link up with a value? Could those be cut?

(2) The 80/20 Approach:
- Make a list of items or services for which you spent over $500 last year.
- Rate each in terms of satisfaction as high/medium/low/can’t even remember what this was.
- Any ideas on what to adjust after that?

(3) The Selfish Approach: 
- Okay, that's a bit cheeky! What I mean here is breaking down which of your major purchases were truly for you (e.g., an incredible meal, a vacation you've always dreamed of) vs. spending to impress others (...tough to admit, but real). Why? The comparison game is set up for loss. There's always a bigger boat.
- I'm all for splurges as long as they're focused on making YOU happy vs. never-satisfied "society" happy. "Selfish" spending is a great way to differentiate.

At Steward, we’re dedicated to helping ambitious professionals in their 20s-40s feel confident they’re making the right money choices, while saving their time and energy for things they enjoy more than personal finance... including finding a job they love, without nagging "money worries" in the background. 

Steward‘s mission is opening up the 1%’s wealth strategies to America’s up-and-coming families with a combination of 21st century tech and trusted advisors. We help families determine how, where, and when to invest and save on taxes in plain-English, with minimal time and effort. Steward can help determine if lifestyle creep is affecting you and your finances, and can advise on how to prevent it from halting your growth and path to financial freedom. Give it a try here.