Jun 28, 2022 | Money management

What is lifestyle creep and why is it draining your finances?

You might think that securing a financial win like a pay rise, new job or promotion naturally flows through to more money in your savings account. Surely with more cash coming in it’s a chance to boost your nest egg and make some big plans for the future right?

Extra money should mean more savings. But it’s more often the case that the more you earn, the more you spend. It’s a nasty little spiral known as lifestyle creep.

In this article, Nook Money’s Chief Mortgage Broker, Cat Denney, explains what lifestyle creep is, how to spot it, and what to do to avoid it.

The lowdown on lifestyle creep

Simply put, lifestyle creep (or lifestyle inflation as it’s sometimes called) is a concept that describes the tendency of people to spend more after an increase in income.

When people get caught by lifestyle creep, former ‘luxuries’ become ‘new necessities’. Spending on ‘nonessential’ items becoming ‘must-haves’.

Some common examples include eating out more often at high-end restaurants, splurging on more expensive clothes, buying more expensive alcohol and paying for cleaners.

Cat says lifestyle creep is not uncommon, and she sees a lot of it on the Northern Beaches. She often works with people who’ve fallen foul of the phenomenon, especially those at the higher end of the income scale.

She says people on lower incomes tend to have a better grasp on how they spend their money. But those with higher disposable incomes tend to have less understanding of where their money goes.

“A lot of people spend a lot more than they think. They’re surprised when I analysis their expenses and tell them what they’ve really been spending. It’s classic lifestyle creep,” she says.

“I’m not referring to the extra spending we’re all having to do at the moment to keep up with inflation and increasing prices at the supermarket. Rather, I’m talking about the non-essential items that chew through our disposable incomes.”

“I see it more with people on higher incomes. They’re lucky because they’re not worrying about their money day-to-day. But the flip side is that they’re not managing their money well and so they’re not saving as much as they could.”

How to tell if you’re trapped

Lifestyle creep sneaks up on you, Cat says. Before you know it you’ve gone from Chandon to Verve, ditched home dye for a $350 trip to the salon and earned E-I-P (extremely important person) status on Net-A-Porter.

To know if you’ve fallen victim, Cat says you really need to sit down and do a thorough review of your spending. It’s likely to take an hour or two, but it’s likely to be worth it.

Here, Cat recommends downloading three months of bank data from all of your transaction accounts and credit cards. Then group them into categories to see where your money is going.

Once you’ve done this, you’ll be able to catch the tell-tale signs: your savings have flatlined, your spending has ballooned and your money is going out without you keeping track.

Tame the temptation 

“Once you’ve done the analysis, be honest with yourself. Are you splurging on clothes and shoes or perhaps it’s fancy restaurants and too many breakfasts out? Whatever it is, work out where you over-indulge and look for ways to cut back,” suggests Cat.

One way to manage your spend is to set a monthly budget for your specific “temptation area” in a separate account. This way it won’t eat into other areas. Another good idea is automating a savings transfer into a separate account to remove the temptation to spend it when you get paid.

Cat also suggests switching up your spending habits to reduce outlay. Ideas here include looking into designer clothes rental sites, a walk with friends instead of doing brekkie every weekend, and buying organic for essential items only.

At the end of the day, if you’re trying to save for any of life’s big purchases, like a house deposit, it pays to focus on the bigger picture and stay well clear of lifestyle creep.

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