Is Your Lifestyle Creeping Its Way Into Your Wallet?

It’s 7:30 on a Monday morning. It’s a beautiful sunny day, which boosts your mood. You’re already in the car and on your way into the office early today! You swing by Starbucks and order a Venti Vanilla Latte $5.47 and you’re super hungry, so you add a Turkey Bacon, Cheddar and Egg White Sandwich $5.36.  Your total is $16.20 + 1.66 (tax) = $17.86. You often swing by Starbucks throughout the week, sometimes even twice a day for breaks or lunch. It’s just so convenient since it’s right there, with a drive-thru, you’re in and out. You download the app, making it convenient to order and to earn points to save. Because of this convenient habit, some of us are spending over $200 a month at Starbucks alone. I think nearly everyone knows someone or fits into this category themselves. Let’s discuss.

We usually have more disposable money as we age. We broaden our education, learn new skills, and expand our experience in our field. Thus, we have increased salaries, raises, bonuses, and other income revenues.

If you’ve ever wondered whether you should treat yourself to that daily latte, this article has the answer for you and how these types of decisions will impact your personal finances.

Additionally, our 401(k)s and investment portfolios grow, as compounding begins to take effect.

Consequently, we start to have the feeling of being rich. This sense of increased wealth causes us to consume more over time (i.e., spend more of our increased money).

We purchase larger homes. Drive luxury cars. We buy nicer clothing. We treat ourselves to upscale places more frequently. We take luxury vacations.

Some of us even overspend.

We become accustomed to a more comfortable, more pampered life as we indulge.

For most of us, this is a one-way track, because it is challenging to revert to our modest habits of the past. Our new, more opulent way of life creeped in gradually, one purchase at a time.

We spent money on things we really didn’t need. We call this Lifestyle Creep.

An example of this is when I was attending college, I could fit all of my belongings neatly into a single small room.  I had a simple, reliable car. And I shared a house with three other people. Rent and utilities were all equally divided.

My current lifestyle is nothing of the sort. That time doesn’t seem long ago, I was just as happy as I am now, but with a lot simpler lifestyle. However, I would have a very tough time returning to that way of life if I had to for some reason. Basically, I’ve succumbed to Lifestyle Creep.

This is one of the few ‘creeps’ that we all yearn for. 

It does raise our cost of living, no doubt. And if we let it go too far, by living beyond our means, the long-term financial costs will eventually catch up to us. All the while, our standard of living gets better and better. Our home becomes more comfortable, we travel, and we experience life. 

After all, there’s a lot more to life than simply being frugal and investing every dollar we earn. Truth be told, most of us aren’t trying to optimize and minimize our lifestyles as our wealth increases. Instead, we’re attempting to maximize our quality of life, within limits on our cost of living … to make sure we won’t be in danger of running out of money in the future.

A “cost-benefit analysis” is the key to understanding lifestyle creep.

As sophisticated people, we should evaluate the costs of having such a lifestyle and then ask ourselves if this cost-benefit is worthwhile both now and in the future. To calculate the cost of Lifestyle Creep, we might consider how much it will delay our arrival at financial objectives.

The 3% Rule

One phrase can describe financial freedom:

‘If our cash flow stopped today, we could enjoy the rest of our lives doing whatever we want.’

Most people refer to this financial freedom as their ‘nest egg’ or retirement. There are a number of calculations and formulas to help you arrive at this number. I like to use the 3% rule.

The 3% rule would require you to have enough money to cover your living expenses for 33.33 years. Whereas the 4% rule would require you to have enough to cover 25 years, and so on.

That is the amount we need to secure. So, we need to look at a couple things to determine this.

Savings & Income

We need to continuously have income and we need to continuously save. That savings obviously goes into investments and compounds over time. Imagine how much you would save if you didn’t stop by Starbucks, pretended that you did, and put that money into your savings account instead?

Here is a visual representation of these concepts.

Financial freedom occurs when “what we have” exceeds “what we need.” So how does Lifestyle Creep impact our journey to financial freedom?

Lifestyle Creep Impacts our Journey to Financial Freedom – Two-fold

1. Lifestyle creep raises the bar for the things we become accustomed to – daily coffee runs, fine dining, overseas vacations, sporting events, and luxury goods.
2. The lifestyle creep now reduces the amount we allocate toward our savings. 

This is the key component to growing our nest egg. 

Lifestyle creep reduces our savings – which is the fuel for our compounding machinery, and our nest egg’s growth pace is slowed as a result. Therefore, “what we have” also suffers. Now, we move further away from financial independence (that joyful state where “what we have” exceeds “what we need”) as we allow more Lifestyle Creep into our life. One of the major expenses of Lifestyle Creep is this: slowing down compounding. Let’s run some numbers to see what this looks like.

• Let’s say our current annual income is $300,000. (After taxes).
• We save $120K and spend the remaining $180K.
• Our nest egg receives these savings and grows by 10% yearly.
• Let’s say our income increases by 8% annually (via business growth, new income streams, promotions at work, etc.).
• And let’s say inflation is 3% annually.

Even with *zero* Lifestyle Creep, our spending will increase by 3% year due to inflation alone. How much time will it take for us to become financially independent?

The amount of Lifestyle Creep we permit in our lives will determine this.

If we adhere to the 3% Rule and have *zero* lifestyle creep, it will take us a little under 15 years (~$9.2M)

Here are the #’s:

The chart will help visualize “what we need” and “what we have” and how they both grow over time as shown here. Keep in mind, “what we need” will always continue to grow due to inflation.

This illustrates no Lifestyle Creep (Any of us? Not me.)

What would happen if we allowed 2% of Lifestyle Creep into our lives each year? In other words, our spending is currently growing by 5% annually (3% due to inflation and 2% due to Lifestyle Creep). But at 8% annually, our income is growing faster. Now, it will take us ~18 years to reach financial freedom, and we will have (~$15M).

Therefore, it will take us 3 additional years and a nest egg that is about 50% larger. This puts the cost of our 2% Lifestyle Creep into another perspective. What if our Lifestyle Creep was considerably greater, at 5% year, for example? Now that both our income and our expenses will increase by 8% year, our savings rate will stay the same. In other words, we will save 25% of our annual income, which will increase by 8% annually. This does not seem like much of a difference, right?

Until we run the numbers and find that it will take us 35 years and a nest egg of more than $88M to retire comfortably! Not to mention continuous income growth for 35 years straight.

Lifestyle Creep can be very expensive indeed.

This is why it’s important to pay attention to these things. Our path to financial independence can be delayed for years by allowing even a little bit of Lifestyle Creep. Each person should take a look at their own financials and goals to see how this looks for them.

Moving on to the more important question. 

Let’s Take a Look at These $10 Latte’s

I’m sure by now everyone has heard the debate of whether you should be spending all that money on daily coffee or saving that money that could lead to your financial freedom. Yes, people actually think not buying a latte will give them financial freedom.

Let’s see what the numbers say.

We know if we avoid the $10 lattes, we know that it will take us a little under 15 years to achieve our financial freedom.

What if we have a latte every working day of the week – or 20 lattes per month.

Each latte visit will be $10.

This amounts to [$10 per day] * [20 days] = $200 / month or $2,400 / year. (Let’s not account for how inflation impacts the latte price).

So, we’ll take an extra $2,400 from our savings each year.

Given that we’re basing our income on $300K+ each year, the $10 latte habit doesn’t make much of an impact. It will add about 50 days to reach our 3% retirement goal. For many of us, it’s a valuable morning ritual that we wouldn’t discard.

But how would this effect someone that is an average earner of say $50,000 a year with income growth that matches inflation (3%). Many average earners don’t see income growth that even matches inflation. This example shows that this person would be working ~34 years to retire and ~37 years – or over 3 years longer to reach their goal! That’s quite a price to pay over a long period time. Keep in mind that this is just a hypothetical, but it will have a profound impact on people with lower income.

Conclusion

In summary, be mindful of the following:

• Lifestyle creep – do I need this purchase, or do I simply want it now that I can afford it?
• Now that I’m making more money, will I be saving more or spending more?
• Practice being frugal and look into discounts, pre-buying, bulk purchases, especially when it’s items that you consume all the time.
• Begin applying the 3%-4% Rule to your lifestyle and begin building your nest egg.

Remember, everyone has the opportunity to make the choice to spend or save. I strongly encourage you to live within your means that matches your goals in life. Many of us are willing to pay for extra amenities that make our lives more pleasurable, where others might not see any sense in that and choose to save and invest.

Throughout your day, be mindful of both your spending and your saving, and watch out for Lifestyle Creep as you are earning more and more. It easily sneaks in and catches up to people quickly when they’re not mindful of it. We’ve seen it all too many times.

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