“LIFESTYLE CREEP” IS SO TEMPTING AS YOU MOVE UP THE CORPORATE LADDER: DON’T BE FOOLED!

As you struggle and work hard to advance, you may be partly motivated by the hope of earning enough to purchase some shiny object. Maybe it’s a new BMW i7 with cashmere wool trim on the seats. Or a Porsche 718 Cayman, which Car and Driver describes as “unflappable” on “twisty roads.” Or your dream may have nothing to do with transportation and everything to do with home. You long for a mansion with tennis courts, a large pool with deck and cabanas, a wine cellar and dramatic landscaping. 

Many people who make large-ticket purchases believe they are displaying their wealth. But the truth is they are displaying the fact that they used to have money. Now they have, not only a fabulously expensive item, but an item that will cost a great deal more over time.  Consider how much it will cost to keep that impressive car in good condition under the hood and looking like new. Consider the cost of furnishing, cleaning and air-conditioning/heating that enormous house.

Suppose you do not buy the mansion or the Mercedes, but have increased your spending across the board as your income increased. You go to fine restaurants weekly, you buy the highest-level concert tickets, you shop a lot more and for higher-end merchandise, you spend on expensive spa treatments well beyond the old haircut and mani/pedi. Your credit cards are now—if not maxed out—carrying a lot of debt.

Now the unthinkable happens. Climate change attacks your city or even your house with—take your pick—a flood, a fire, a tornado, an ice storm, or even, less catastrophically, drought causes your house to settle requiring major foundation repairs. 

Or maybe the stock market takes a dive. The deal you were counting on falls through. You don’t get the promotion you were expecting. A larger company takes over yours and you are laid off. And you don’t have the savings you need to rely on in this unanticipated emergency.

“Lifestyle creep” is a serious impediment to the kind of wealth accumulation that protects the present, prepares for the future and will save you from being stuck in the rat race forever. Too many well-intentioned people put a fixed amount aside in savings and investments every month and spend the rest on their daily living. As their income increases, they keep spending up to the limit of their income and fail to increase proportionately the amount they are saving and investing.  

They risk continuing to live  from paycheck to paycheck indefinitely, just to cover the debt payments on their luxury purchases and the increasing cost of upkeep on those purchases. They have to keep running on the wheel in their personal hamster cages just to stay afloat. At the end of a year, they look at their tax return and ask themselves, “Where did it all go?”

There is a way out of this common pickle that is easy and very effective. Instead of putting your income into a checking account and then allotting a portion to savings, have all your sources of income go directly into your savings account.  Then create a monthly allowance, a fixed, automatic payment to your checking account, that will cover your bills and control your lifestyle. Instead of “set it and forget it” for your savings, arrange for “set it and forget it” for your lifestyle. No more keeping up with the Joneses. You are safe and secure, prepared for any emergency, and confident that your savings and investments are growing comfortably and providing you with real wealth, not a mirage or illusion of wealth.

You’ve now acquired discipline in your spending and saving. That doesn’t mean you have to deny yourself and your family any enjoyment or that your lifestyle has to be painfully spartan. Does avoiding lifestyle creep mean you can never have that luxury item you have dreamed of? Absolutely not.

Many investors set a “high-water mark” for their savings. When your wealth accumulates to that point, you can set aside some of the income that follows to help you reach that long-term goal. 

But, again, some real thought needs to go into setting those long-term goals. Will they really enhance your life or just provide transitory pleasure? Will that expensive item you’ve longed for be an endless drag on your finances over time? Maybe you can be happy with a lovely, comfortable home that is not a mansion with a bowling alley and home theater. Maybe a dream item might be—instead of a McLaren Artura–an extended vacation, or more than one, to acquaint the family with another part of the world. Only you know for sure what is right for you and your family.

But, whatever your dream turns out to be, the first step is avoiding lifestyle creep, or, as some call it, lifestyle inflation. Set your sights on real wealth, not the gaudy indicators that you used to have wealth.

Written by Christopher (Chris) Manske.

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