How to Overcome Lifestyle Creep For Financial Freedom

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How to Overcome Lifestyle Creep For Financial Freedom

(This post was first published on ThinkSaveRetire. Thanks a lot to Steve for the opportunity of guest posting.)

My personal goal is to become Financially Free as soon as possible. As a software engineer in Switzerland, I am earning about 130’000 USD per year. As such, I am viewed as a high-income earner.

People think that earning a high-income makes it easier to become Financially Free. And on some counts, it does. But most high-income earners are not financially free and a lot of them are not even wealthy.

People believe most high-income earners are wealthy. Indeed they generally show signs of wealth such as a very good car, a large house, and very good suits. But, a lot of these people do not have any savings and accumulate large amounts of debt. They are not wealthy at all!

The main reason for that is Lifestyle Creep! In this post, we are going to see exactly what it is. I am also going through my own experience with it. And more importantly, how high-income earners can overcome lifestyle creep for Financial Freedom!

Lifestyle Creep

Let’s start at the beginning: what is lifestyle creep?

As they earn more, people have a tendency to spend more. This means that even though you earn more money each money, you are not saving more. This is as simple as that. But it has a large impact on their finances.

Lifestyle Creep is the main reason why many high-income earners are not wealthy. In fact, many high-income earners are less wealthy than some low-income earners. To keep up with their lifestyle, high-income earners are often using credit. They have enough money to pay their bills and their interests each month. But they do not contribute to increasing their net worth.

This is surprising for many people. But when you think about it, it makes perfect sense. If you spend as much as you earn and you buy depreciating assets, your net worth will not grow. You may earn 250’000 USD per year, if you spend it all, you are not becoming any wealthier!

Of course, lifestyle creep does not only impact high-income earners. Even a small raise to a low-income earner can turn into an inflated lifestyle. Nevertheless, the more income you get, the more you can inflate your life. And consequently, the worse you can make your situation.

My Experience With Lifestyle Creep

My journey into Financial Independence started with my own experience with Lifestyle Creep.

I have kept a budget since my very first income. This is a great thing! Yet, I did one big mistake. I always kept a budget where the total of my budget was also my income. And this is a terrible idea.

At the end of the month, I was always happy if the sum was positive. And it was almost always negative. I was saving a little money every year. And I was able to invest some money in my retirement accounts. Once I got my first raise, I simply updated my budget to increase it to my current income level.

And of course, I directly started to spend more. My big issue was with computers and technology. I am a huge geek. And I started playing with servers at home. I bought a server rack and started buying and installing servers. It was a lot of fun, to be honest. At some point, I had 10 computers at home. I also had a lot of DIY home automation gadgets. At this time, I did not realize what was going on with my finances. After all, my budget was always positive.

At some point, I added tracking of my net worth in my financial dashboard. And I realized that it was almost not increasing. It came a bit as a shock for me. I was living alone and I had an okay salary that was increasing. So how come I did not have more wealth? I took a look at my expenses over time and I saw that they increasing faster than I ever realized.

I made some research on the internet for ways to make a better budget. And I discovered the concept of savings rate. I added this into my financial dashboard. And I took a look at how it evolved over the years. Here is my Savings Rate over time when I did that:

My Savings Rate Decreasing Over Time
My Savings Rate Decreasing Over Time

I soon realized something was really wrong. My income increased significantly, yet my savings were worse. This was a wake-up call. After this, I decided to seriously cut down my expenses. And I started considering long-term goals.

Fortunately, I never went into debt for lifestyle creep. I paid for everything with cash. And I never went over budget. I never used my savings to sustain my lifestyle. I am considering myself very lucky for that.

Life as a high-income earner

Today, I earn much more than before. But I did not fall into lifestyle creep again. I am saving much more money now. My current average savings rate is almost 50%.

My current income is about 130’000K USD per year, as a software engineer. Even for Switzerland, this is considered as high-income.

Fortunately, I overcame lifestyle creep before I was a high-income earner. Otherwise, I would have wasted a lot more money.

Now that I am a high-income earner, I manage to keep my spending in check. When my earning increases, I simply increase my savings. Every new penny simply goes towards my goals.

Use Goals

I think the best tool there is to manage my expenses is to have goals. Before I started being serious with my finances, I did not have financial goals.

Now, I am setting myself goals at the beginning of each year. This helps me a lot during the year. When I get new income, I can simply work towards my goal. I do not think I am loosing out on anything with this. I can see the progression of my goals.

Our current goal is to become financially free as soon as possible. We are not far on the track to Financial Independence. But we are making good progress. We will also probably buy a house during our journey. And children will likely come and change our plans. But I have no doubt that our goals will help us!

Now, not all of the goals have to be aimed towards finances. You can set goals to buy a new TV by the end of the year. Or better, you can set a goal to buy a new car, in cash, in six months. That way, you force yourself to save money towards something you want.

One thing is important: there is nothing wrong with spending money. You are working hard for it. If you want a very good dinner once a week. Then go for it! You need to take each purchasing decision being aware of its impact on your finances. And you need to weight the cons and pros of each spending.

Understand your expenses

There is one thing that is incredibly important and that many people often disregard. You need to understand your expenses.

The first thing you need to do with each expense is to understand how they will impact your goals. This is why your goals are incredibly important. Once you have goals, you need to ask yourself these questions for each expense:

  • Will you be able to reach your goals with this expense?
  • If not, how much will this put you back?
  • Will this expense come back in the future? Is it recurring?
  • Will this expense incur some other expenses later on?
  • How happier will you be with this expense?

You will see that once you have goals and you ask yourself these questions, you will avoid most expenses.

Consider upkeep costs

I think that the question that most people ignore is “Will this expense incur some other expenses later on?“. This is more important than you may think.

A puppy may be cute as hell but may cost you more than you think
A puppy may be cute as hell but may cost you more than you think

Indeed, some of your expenses will incur maintenance costs or upkeep costs. For instance, if you buy a puppy for 100 USD, you may well spend more than 500 USD each year to take care of it. You need to think of food, toys and veterinarian fees. Once again, that is not to say you should not buy a puppy if you want one! But there are important things you need to consider when you buy it, not only the purchase price.

Another very good example is when buying a new car. If you upgrade your car, you will also increase your upkeep costs. A bigger car will likely cost you more in insurance. A stronger car will also use more gas and you will spend more to fill it. A better car often also means higher fees for maintenance. Tires will be more expensive as well. These are all the things you need to consider for this expense.

But most people do not care about that. People only think about the purchase price. This could be a great mistake! If you buy several things that then incur a lot of expenses later, you may quickly end up with a lot of extra expenses. And you will wonder how you ended up there!

Do not look up to the Joneses

You probably have heard it many times already, but it is very important! You do not want to try to keep up with the Joneses.

Generally speaking, society expects you to spend more as you earn more. High-income earners are expected to:

  • Have a big house
  • Have a big car
  • Dress very well
  • Play golf!
  • Have expensive vacations

And this is not an exhaustive list. These expectations have been here for a long time already. You need to fight these expectations for your life. There is no reason you cannot have a high income and a low-end car for instance.

If you ever come to my company parking, it will be easy to spot my car. My car is the cheapest in the parking and by far. My car probably cost twice less than the next cheapest car of my colleagues. And some of these cars are 10 times more expensive than mine. Do I feel any worse because of that? No!

My car never brought me any pleasure. It is just a tool for me. It transports me from A to B every day and does it perfectly fine. I bought it new and I paid for it in cash. I have very low maintenance fees on it. Sure, it is not shiny and nobody will ever waste a sight on it. But it works!

Should every high-income earner live like that?
Should every high-income earner live like that?

We rent a small apartment and we do not play golf. And all our vacations are kept on a small budget. Do we have a worse time because of that? No!

Because we follow these simple rules with our finances, we can save half of our income every month! This will help us buy a reasonable house in a few years. And this will help us become financially free earlier than if we were trying to do what other people are doing!

High-Income and Financial Freedom

To a lot of people, it must seem like earning a high-income helps a lot to become Financially Free. But it is not that simple.

As we saw, high-income earners are not as wealthy as we may think. They are faking wealth and people see them wealthy. But a lot of them will never be able to retire if they want to sustain their lifestyle. And for some of them, retiring would mean cutting in half (or more) their expenses. But you cannot cut half of your expenses and keep the same lifestyle!

Of course, a high-income is not all that bad! But, you need to decide on a certain lifestyle. Once you did that, earning a high-income can help you become financially free. If you are not spending, more income means you are saving more on a monthly basis. This is extremely valuable. Saving more will mean you will be able to become Financially Free faster!

Conclusion

Simply having a high-income does not make anyone wealthy. And it does not make anyone become Financially Free any faster! Most people with high-income simply spend more than people with less income. It makes sense, right?

Whatever your financial goals are, you need to be cautious with lifestyle creep. It is a trap in which it is very easy to fall into. Everybody should be aware of this trap!

If you are careful with each of your expenses, you can avoid this trap! For this, you will need to set yourself some Financial Goals. What do you want to achieve? This will help you decide which expenses are worth it and which are not.

And you will also need to consider the upkeep costs of your purchases. Most people ignore that and end up with expensive costs from smaller purchases. The direct price of a purchase is sometimes only the tip of the iceberg!

By following these simple rules, we are able to overcome lifestyle creep ourselves. It is not easy of course. Sometimes the temptation is big. But once you consider your real goals, you realize that most expenses will not make you any happier!

What is your experience with lifestyle creep? Did you overcome it? Are you struggling with it?

(This post was first published on ThinkSaveRetire. Thanks a lot to Steve for the opportunity of guest posting.)

Mr. The Poor Swiss

Mr. The Poor Swiss is the author behind thepoorswiss.com. In 2017, he realized that he was falling into the trap of lifestyle inflation. He decided to cut on his expenses and increase his income. This blog is relating his story and findings. In 2019, he is saving more than 50% of his income. He made it a goal to reach Financial Independence. You can send Mr. The Poor Swiss a message here.

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