by Nick Stewart (CEO and Financial Adviser at Stewart Group)
Lifestyle creep is insidious. It refers to the increase in discretionary spending when one’s standard of living improves – and it’s not all luxury goods. Many people are caught out over time by little ‘indulgences’ that slowly and surely stack up, effectively exhausting any additional income from a change in career or job.[i]
It’s understandable. You work hard and feel a little richer for it, so you want to reward yourself. “You deserve it!” But if you are spending as fast as you are earning (or faster in some cases), then you aren’t really rewarding yourself at all – you’re just punishing your future self.
The risk in using all your additional resources for nice-to-have expenses, is that you may lose this income at some point. If you or your partner fall ill, become unemployed, retire... those little delights that seem harmless on a good wage will quickly drain your savings. You do not want to get to retirement and realise you lack the funds to sustain your current lifestyle, forcing you to either keep accumulating longer than you planned, or seriously downgrade your lifestyle to stretch your funds further.
These expenses can creep up over time as income increases (hence the moniker). When you are in a position where you’re earning more than you used to, it’s very tempting to dedicate part of this to buying things you couldn’t easily afford before. Spending decisions become less about whether you need something, and more if you feel you are entitled to it. This could look like shopping at more ‘upscale’ grocery stores, buying more luxury-coded brands of clothing and footwear, or even something as simple as buying lunch every day where you used to bring in last night’s leftovers. Lifestyle creep is difficult to stop because it can ramp up alongside your income, making it hard to notice at first – and it’s often not limited to just one area of spending, like food or holiday planning.
In these busy modern lives of ours, lifestyle creep also goes hand in hand with the cost of convenience.[ii] We have technology and services available almost everywhere to make our lives easier and more streamlined.
Think of grocery delivery – many people would never have even considered this pre-covid. Driving to the store and doing the shop yourself costs less, but if you are someone who values convenience, you will likely write off the cost of delivery as worth it (that you deserve to have this convenience regardless of whether it’s necessary or not). Services like Doordash and Uber Eats have completely changed the landscape of the convenience sector; a NZ Herald article from 2022 reported 25% of young people were regular users, with Uber Eats alone adding more than $162 million to the economy each year.[iii]
Like many things in life and finance, sticking to your plan will save you a lot of strife when it comes to lifestyle creep.
Here are some ways you can navigate around it:
1.) When you receive a wage rise, start saving 25% of that raise and gradually scale up to 33%. It’s great way to introduce a savings discipline without feeling like you are sacrificing a lot, or worse; doing nothing, consuming the wage rises, and having an audacious savings goal for your final working years.[iv]
2.) Keep track of your expenses and create a budget... and stick to it. Knowing exactly what your outgoings are (bills, mortgage or loans, subscriptions) is key to narrowing down areas of potential overspending.
3.) Don’t just pick a random number for your retirement savings goal. You need to match your retirement savings to your lifestyle expenses – and if you can’t, you may need to reassess how you’re living now, and how you plan to live in future.
4.) Who you spend time with can impact your savings. You and your partner should have similar goals. Beyond that, if your social circle shares your financially savvy mindset, you may find yourself less motivated to keep up with the Joneses. Sharing similar aspirations can help all involved stay on track (instead of encouraging the ‘treat yourself’ attitude).
You want to build your financial house to withstand life’s storms. This means planning for the future, rather than living in the now. Do you have a savings plan? Do you regularly contribute to things like KiwiSaver or other trusted financial products, to make your money work harder over time? Do you have appropriate insurance coverage in case of illness, income loss, or the unthinkable?
As when building a real house, consulting professionals is always a good idea. Sitting down for a chat with a trusted fiduciary can be an invaluable step in your financial journey.
It’s your financial freedom, after all. You deserve it.
· Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. Article no. 321.
· The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
[i] https://www.investopedia.com/terms/l/lifestyle-creep.asp#:~:text=The%20rise%20in%20discretionary%20income,right%20rather%20than%20a%20choice.
[ii] https://medium.com/swlh/our-obsession-with-convenience-is-deceiving-878c87fcb10a
[iii] https://www.nzherald.co.nz/nz/food-delivery-wars-doordash-uber-eats-menulog-delivereasy-and-yummi-compared/XS6DEEL2X6HPALTM4IQ6CH2VGQ/
[iv] https://www.cnbc.com/2020/01/23/simple-rule-will-help-you-save-more-of-your-next-raise.html#:~:text=Or%20you%20might%20find%20saving,and%20make%20changes%20as%20necessary.
