The Personal Finance Podcast - How To Prevent Lifestyle Creep (Lifestyle Inflation)

Episode Date: July 29, 2020

Episode 12: How To Prevent Lifestyle Creep  In this episode we cover:  What is lifestyle creep (Lifestyle Inflation) Signs You May Have Fallen Victim to Lifestyle Creep  How to Prevent Lifestyle Creep  Why Lifestyle Creep Can Be Terrible for Your Finances The Most Common Lifestyle Creep Categories  Resources in this episode:  M1 Finance Best Place to Invest  Personal Capital Free Wealth Management and Budget App CIT BANK (Best Savings Account) Learn more about your ad choices. Visit megaphone.fm/adchoices

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Find your advisor at IG Private Wealth.com. On this episode of the Personal Finance Podcast, we're going to talk about lifestyle creep and how to prevent it. What is up, everybody, and welcome to the personal finance podcast. I'm your host, Andrew, founder of dollar after dollar.com. And today, we're going to be talking about one of the biggest problems and one of the biggest things that people fall into with their finance. And that is lifestyle creep. And you may have heard of lifestyle creep, and some people call it lifestyle inflation, but it's a silent thief. And it is the biggest problem with your money. And if you're not careful about controlling lifestyle creep,

it can completely destroy your finances. It's the main reason why high income earners still live paycheck to paycheck. You can think about athletes who've made hundreds of millions of dollars who go completely broke because they're human just like us. And they've allowed their lifestyle to creep up slowly over time. And they don't really. realize that their lifestyle is creeping up. They grew up maybe in a middle class situation. And as they made a little bit more money, then they started to purchase a little more and get used to that lifestyle and it just crept up slowly more and more and more. And a lot of people who fall victim to lifestyle creep actually think they're successful. They actually think that other people also think

they're successful. They have a nice car. They have a big house. They go on exotic vacations. But if all your money goes out the window, you'll never build true wealth. And you're robbing your of your freedom. That's the biggest thing that you're losing when you allow lifestyle creep to set in is you're losing your freedom. The trick to this is to recognize lifestyle creep before it starts. And that is the biggest key. You have to stop lifestyle creep in its tracks. So I'm going to show you exactly how to prevent lifestyle inflation for good. Let's get into it. So you may be wondering what the heck is lifestyle creeper? What is lifestyle inflation? And it's actually a simple concept. So if you think about when someone gets a raise at work or when you've gotten a raise at work,

people think that they need to reward themselves. And maybe they buy a nicer car or upgrade to a bigger house or you spend more money on clothes. And it's a very slow process. You barely notice it happening. So a lot of times what people will do is they'll get a raise and maybe they'll move into a nicer apartment. They'll rent a nicer apartment in a nicer part of town. And then they'll get another raise and they'll get an even nicer apartment. And lifestyle starts to creep up. And there's nothing wrong with doing anything like this, but if you constantly let your spending creep up, you will never, ever build true wealth. And typically what happens is people continue to get raises and they continue to allow their lifestyle to creep up. They increase their spending without

increasing their savings as well. See, there's a balance to personal finance. There's a balance to the way you have to actually manage your money. And if you continue to increase your spending, but do not increase your saving, then you're running on a treadmill. You're not going anywhere. Then what a lot of people do is they just continue to upgrade and maybe they upgrade to an even bigger house. So they purchase a house which has a bunch of rooms that they'll never use. But if they took that money and saved it and invested it instead, you would see a massive difference in your finances over the course of that time period. So the way to think about spending is to spend money on things that bring you true value. There's value and there's price and they're not one

in the same. So you have to understand the difference. And balancing spending towards only things that bring you value and allocating the rest of your money towards your investments is how you build real wealth. There's some true ways that you can ask yourself if you've actually fallen into lifestyle creep. And one of the best ways to do this, especially if you make a decent salary, is to think back at your entry level position. What was the number that you thought of when you were in that entry level position that you thought, if I made X amount, I would be happy. So maybe you started off making $40,000 a year and you said to yourself, if I just hit $90,000,000, a year, then I'll be happy.

Then eventually you go along and you hit that $90,000 a year goal and your lifestyle inflates. Then you start to think, well, maybe I just need to hit $120,000 a year. Then I'll be happy. So you hit the $120,000 goal. And then you think, now I need to hit $150,000 a year, then I'll be happy. This begins to get worse and worse over time. You take on more payments. You take on a bigger mortgage.

You get buy a nicer car, take on bigger car payments. And then you want more. And it increases and it inflates. And if you're earning a high level income and you're still not satisfied, but you think back and say, hey, I used to think if I hit this level, I would be happy, but I'm not. Then maybe you need to look around and say, has my lifestyle crept up too much? Are there things around me that don't bring me value? And if everything around you brings you true value, it truly makes you happy, then great, continue pursuing, increasing your income.

But if that's not the case, if there's things that you purchased that don't bring you value and don't bring you happiness and don't bring you true joy, they need to reconsider those items. You need to reconsider the way you're spending your money because your lifestyle is creeping up. And most people don't realize it. Trust me, a lot of smart people don't realize that their lifestyle is creeping up. But if you can realize this,

you're going to be 10x ahead of anybody else with your personal finances. Because if you can control this creep, it's going to completely change your life and it's going to completely change your investing goals and everything else around you. Because now you're buying freedom instead of stuff. Now you're buying time back.

which is the most powerful thing you can do with your money. So let's get into how to prevent lifestyle creep. So lately, I've been noticing how fast things are changing at home. The kids are growing like crazy, clothes don't fit anymore, and routines are changing. And it just hits you. Life is expanding. And when your life grows, your responsibility grows with it. That's something I've been thinking about more this spring,

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customizable plans at squareup.com. So you may be starting to recognize that you've fallen into the lifestyle inflation trap. And congratulations if you have, because your self-awareness is much higher than most people in this world. So start off by congratulating yourself. Because most people don't ever even see this downfall. They just let their lifestyle inflate and they think that's just the way it is.

But the key is to prevent this lifestyle from continuously inflating. So I'm going to give you a couple tips that I've used where I've consciously stopped lifestyle creep from getting to out of hand because it can get out of hand. And the first step is to track your. your spending. So nobody wants to hear the word budget. I understand that. Budget is a cuss word to some people. Nobody wants to ever budget. They think it's hilarious that people will even consider maintaining a budget or you've tried to budget and fail. But it's super important to have a way to track your spending because it allows you to ensure your spending doesn't get out of control.

And lifestyle creep takes away your investing power when your spending gets out of control. It takes away your freedom. It takes away the power that your money has. So understanding where your money is going each month is the only way to get a hold of your spending. It's the only way to actually understand where your money's going. Because a lot of people think they know where their money's going, then they start to actually track their spending. And they realize they're spending much more money on certain things like groceries or housing or different items that they may have thought that they're spending much less on.

And you can do this through apps like personal capital is my favorite. But you can also use Wynab, which I've used for a long time. or you can even use a simple spreadsheet. Now, personal capital and a spreadsheet are free, and why not you have to pay for, but they're all fantastic options. Or you can do the stress-free budget, which I've talked about plenty of times in this podcast,

whereas you save your money first, you take it right off the top when you get paid, then the rest of the money you spend on your expenses or whatever else you want to buy, your fund money, anything else like that. And that allows you to not have to stress out about budgeting if you truly can't stick to it. And it saves you time,

because all you have to do is take your savings percentage off the top, and the rest of it you just go ahead and spend. The second way to stop lifestyle creep is to understand what truly brings you value. Because once you start to understand your values, it's going to help you tremendously when making decisions about money. You all of a sudden have true clarity of exactly where you want your money to go and what you want your money to do. And you see every piece of spending as a trade-off.

Because frivolous spending on things that don't bring you value will take away from spending on things that bring you true joy. So you can buy this thing, but that also means that there's a trade-off, an inherent trade-off that you can not buy something else that brings you true value. So make a list of what matters to you. And I did this once.

I made a huge list of exactly what I wanted and what matters to me. It produced true clarity for me. Then spend lavishly on that list. Yeah, you heard me right. A personal finance guy just said, spend lavishly. But the thing is, the things that bring you true value

or what you should be allocating your money towards. And if you want, make a second list that consists of things that you're spending money on that don't bring you true joy. You're starting to realize that you're spending money on things that really don't bring you true joy and just make it a no buy list. Don't buy it anymore. I'm not talking about things like car insurance or utilities. Obviously, all that stuff is a necessity.

But if you're eating out every single day for lunch and it doesn't bring you true value and you're spending a couple hundred dollars a month on lunch, then maybe you should rethink that. Something like a couple hundred dollars on lunch every single month. could also be a European vacation every year. So there's tradeoffs to every single thing that you purchase. And the biggest thing is to look at the big ticket items, because if housing or a fancy car or anything that's a big ticket item

doesn't bring you value, then you don't let it suck out your hard-earned dollars. Don't let it take away your money from you. Look at those items and say, hey, how much of this do I need to bring me full fulfillment? The third tip is when you get a raise, increase your savings rate. This is one of the biggest things that you need to do.

Every single time you get a raise, increase the amount that you're saving. And one of the best ways to do this is to automate your savings. In one of our earliest episodes, we talk about automating your money. And automating your savings is one of the best ways to make sure that you're actually allocating enough funds towards your savings and investment. And if you do this immediately after you get a raise, you're not going to feel the difference. You're already living on less. and if you allocate, say, 50% of your raise every time you get a pay increase,

you're not going to feel any different. You're not going to feel the difference at all. And this tip alone can stop negative lifestyle inflation in its tracks. Because I'm in no way saying don't buy a bigger house or don't buy a nicer car because if those things bring you value, then definitely buy those things. Just take, for example, if you got the modest 3% raise every single year, which if you're listening to the personal finance podcast, you know we're teaching you ways to get more than that 3% raise every single year.

But let's go to the bare bones minimum. Let's say you get a 3% raise every single year for your entire career. If you saved just half of that 3% raise, just half. So 1.5% a year, in 25 years, you will have saved 40% more than where you are today. So now think of the difference

if you're getting bigger raises or promotions. Say you get a big 10% raise or you get a big promotion, that's a 20% raise. And you're saving 10% more within that big promotion, there's a massive, massive compounding effect that happens when you save parts of your raises. And that's why it's extremely important to do this right away.

Because if you wait too long, your lifestyle's going to inflate, you're going to get used to that lifestyle inflation or that lifestyle creep. And then you're going to go ahead and not save as you should. You're not going to save the increased amount because you're already used to that lifestyle. It's extremely hard to go backwards, as you probably already understand by now. It's extremely hard to save more when you're already used to a lifestyle because now you're cutting out and you're cutting back and nobody wants to cut back nobody likes to cut back let's just get real here cutting back sucks so if you do it right off the top if you do it right when you get a

raise every single year then it's much less of an issue than if you wait too long so just do it right away the next tip is to create a blow money fund so my wife and i have had these for a long time and what we do is we have what we call the bmf or our blow money fund so my wife has her own that we allocate to, and I have my own. And these are two line items in the budget that we allocate to each other each month. My wife gets double what I get, but whatever. And we allocate it to these accounts each month, and we can just blow it on whatever we want. There's no questions asked.

We can just take this money and buy whatever the heck we want. If I want a new golf club, I'm going to get myself a new golf club. Daddy's going to hit that driver right down the middle of the fairway. If my wife wants some $500 shoes, that looks like they've been dragged through the mud, because she does, then she can go out. head and buy that. But this allows you to spend on what brings you value without having questions asked, especially if you're managing your money with a partner. And this can reduce stress and anxiety with a partner so you're okay spending on certain things that bring you value.

The final tip I have is to automate your investments. And we just talked about this when you save off the top, you really need to automate your investment so it automatically goes into your brokerage account. Because lifestyle creep robs you of your investing power. It just does. And the more money you stuff into your brokerage account, the faster you're going to be financially independent. So the question becomes, what do you want? Do you want more stuff or do you want freedom? There's no in between here. If you want to work for 40 years, great. If you don't want to work for 40 years, then you have to make a choice for a short period of time. So make sure you set up automated transfers into your brokerage account so you can continue investing and continue pursuing your

goals. Now, let's get into why lifestyle creep is terrible for your finances. Hey, real quick, If you're getting value out of this episode, leave a rating and review in Apple iTunes and share it with a friend. Now let's get back to the episode. Increasing the gap between your income and expenses is the most powerful growth accelerator to building wealth. And you could do this in two ways. You can either control your expenses so you don't let your expenses get too high and you

can still enjoy nicer things, but not spending the entire amount of what you make on things that don't bring you value. And the second way is to increase your savings rate. So to increase your savings rate, you want to increase your income. and reduce your expenses at the same time to have drastic, drastic outcomes. Because your savings rate truly matters. And it's one of the best ways to level up your finances, even if you don't make a lot of money,

because it allows you to invest more and save for emergencies. But Lifestyle Creep will rob you of growing the gap. It'll rob you of being able to grow this gap between your income and your expenses, because that is the main goal, is to grow the gap between your income and expenses. And what happens to a lot of people is lifestyle creep will start to rob them of growing the gap. It'll start to take away the opportunity to grow this gap because as their lifestyle inflates, the gap actually begins to shrivel. And I've seen people actually make more money. And as they make more money, they're spending decreases to almost nothing. And I actually have a reader who reached

out to me for help because their savings rate was negative as their income increased because their lifestyle inflation got so out of hand. Then they started spending so much and getting so used to their lifestyle inflating that they actually went into debt. And when they were making less money, they were saving 30% of their income. And that's the danger of lifestyle creep. It's the danger of lifestyle inflation. It can take away the power your investing has. It could take away your savings rate. It could take away your family's financial future and it can take away your protection. And that's the biggest danger is losing your financial future. But if you can control lifestyle creep, then you'll be able to protect this better than anyone else can. So you may be thinking, well, have I let my lifestyle

creep up? Have I let my lifestyle inflated? I don't really know. And I'm going to go through the biggest areas that people actually allow lifestyle creep to creep into their life and the biggest areas that they let their lifestyle inflate. And it's actually in the big three. The areas that you really want to control are your biggest expenses. And these are the biggest expenses for everyone. So the first one is groceries and eating out. A lot of people that I teach, to get onto a budget, finally do so, and they realize they're spending way more on groceries than they actually thought they would. Now, if groceries bring you value, if you're a foodie or you love to eat, and groceries and dining out bring you value, then spend lavishly on that stuff.

Spend on what brings you value. But if they don't, and you're spending a ton of money on groceries and you just don't care about it that much, then you have to get control over it. So if you truly are living paycheck to paycheck and you really don't understand where your money's going, look at your grocery bill first because a lot of times that's where people don't understand where their money is going and they spend way more than they need to on groceries. And the same thing goes for dining out like we were just talking about. If you're eating out with coworkers every single day, then you could be spending hundreds of dollars a month, which amounts to thousands of dollars a year. And if that brings you value, great. Keep doing it. But if it doesn't, then you got to get control

over this stuff. The second one is housing. So housing is one of the biggest expenses, if not the biggest expense in your life. I know it's the biggest expense in the majority of Americans' lives. And as your income grows, you're going to want to upgrade from renting a house to potentially buying a house. And if you buy a house, great. And most people will buy a starter house. And they usually buy the most decent thing that they can afford. Then they get a big raise and they buy a bigger house because they have a couple of kids. And so they buy their forever house. And the forever house has a few extra bedrooms for their kids just to make everybody comfortable. And maybe they have a dog and they want to get a backyard and things like that. And this is where a lot of people should stop. Their forever house is perfectly comfortable for them

and their family. But then they get another raise and they buy a bigger house and they continuously take on more and more debt. And they're not ever able to actually pay down their mortgage. They're not ever able to live a mortgage-free life. And the last one is cars and transportation. If cars bring you value, a lot of people love cars, then spend lavishly on cars. But if cars do not bring you value, they are a huge lifestyle inflation proponent. A lot of people will buy. A lot of people will buy a crappy car when they get their first job, or they have a crappy car through college in high school, then they get their first job and they take on their first car payment, then they get a promotion, they buy a BMW or Mercedes, and they get another promotion, and it just keeps

inflating from there on and on and on. And this is all too common, just to impress other people, people are buying fancier and fancier cars, instead of just driving their cars for 10 years and then allowing to get another car as time goes on. Now listen, if you've let your lifestyle don't beat yourself up because we all let our lifestyles creep up. It's part of growing as a person. It's part of increasing your lifestyle as a person and actually using your money and spending your money on things that you want. It's actually healthy for your finances. When I first bought a house, I did all the yard work. I refused to pay someone else to do something that I was able to do and I hated every single second of it. I hated doing yard work, but I didn't want to spend all this money

to allow someone else to do it. And over time, as my income increased, then it increased again, I grew tired of spending five hours a week on my lawn. It just took, it literally took me five hours a week to do a small lawn. And I was extremely reluctant, but I hired another company to do it for a hundred bucks a month. And it's the best $100 a month I've ever spent. It truly brings me joy to not have to go outside in the middle of the Florida heat and mow the lawn every single Saturday morning. And the added benefit is they do a much better job than me. So my lifestyle crept up by taking on an additional $100 payment each month to pay the lawn guy. But I'm spending money on something I enjoy.

I'm buying time back. I'm buying five hours a week back, 20 hours a month just by spending $100. And that's what your money is there to do. And I've since bought a bigger house. We bought in fancier cars. Increased our spending in almost every single category. But I've done it in a controlled way,

using the lessons we just discussed. And if you can do that in a controlled, balanced way and increase your spending along the journey, then you have a healthy lifestyle creep, my friend. I always increase my saving and investing first to reach my goals. Then I spend what is left over. So take it from me. Lifestyle creep isn't always bad.

And this is coming from a guy whose lifestyle has crept. Thank you guys so much for listening. And if this is our first time meeting, consider subscribing so you never miss an episode. And hey, we're giving away a free one-on-one money coaching session with me. All you have to do to enter is subscribe to this podcast and leave a rating or review on Apple Podcasts, then send it over to Andrew at dollar after dollar.com, and you'll be instantly entered to win the one-on-one, one-hour coaching session with me. Again, thank you guys so much

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