A friend of mine lived an envious lifestyle. She only wore branded clothes that she picked up when she was abroad. Dined in expensive restaurants. Her annual vacation was always abroad, and she would only fly business class.

When she lost her job due to completely unforeseen circumstances, she was naturally devastated but not ruined. She was living with her parents so the basic bills (food, electricity, wi-fi) were taken care of and she had no rent to pay. Neither was she in debt. However, her lifestyle changed overnight. She stopped eating out, stopped travelling, and stopped shopping.

Life hits differently when the regular and predicted cash flow (by way of salary and earnings) stops.

We give ourselves permission to live lavishly supported by our income. Paying scant attention as to whether such a lifestyle can be maintained when circumstances change. What would happen if you lost your job and the new one pays much less? What if an earning member of the family passes away? Besides job loss and death, what about retirement? How does the lifestyle adjust to the new circumstances? Will you be able to claw back on your lifestyle?

Before you say yes, look at various areas of your life.

• I used to cook my food. But once I started earning well, I hired a cook. Now that I have a cook, and I see how convenient it is, I don’t want the hassle of going back to daily cooking.
• I used to ride a scooter but after a few years of working, I could afford to buy a car. My first car was a used car. Now, I bought a brand new car. Now, I will never buy a used car, and neither will go backwards to a ‘lesser’ model.
• I employed a driver. It is so convenient and stress-free not to drive or look for parking. Now, I can’t imagine a life without a driver.
• I bought a 3-bedroom apartment. It is so spacious and comfortable. There is an extra bedroom for guests and one room is my library and study. Now, I do not ever want to shift to a 2-bedroom.
• I fly business class. Or, at the least, Premium Economy. Now, I can’t imagine cattle class.
• I only stay in 5-star or 4-star hotels when I travel. Now, I can’t imagine downgrading.
  

The truth is that we upgrade in all aspects of our life. Where we shop for groceries. The very ingredients we buy. The restaurants we eat in. The alcohol we consume. Our wardrobe. The latest iPhone. A Rolex. An annual vacation abroad.

Be aware of Lifestyle Creep.

As your discretionary income rises, so does your standard of living. This is not something that happens overnight, it “creeps” up on you over the years. It is subtle, and not overt. An upgraded and more expensive way of living that gradually builds up over time is called lifestyle creep.

On the face of it, there is nothing wrong. This is perfectly natural. We work hard, and as we earn more, we want to live in comfort and luxury. We want to upgrade our lifestyle. Who doesn’t? However, the psychological impact of that upgrade and the financial ramifications are huge. If you are not cautious, your lifestyle costs will increase at a much higher rate than your income. Years from now, you will find yourself in a tough spot. Let me explain why by putting yourself in two different situations.

Situation I: You live within your means, take no loans, but spend 75% of your salary.

Situation II: You live within your means, take no loans, but spend 55% of your salary.

In the first situation, you have a longer road to financial independence because you need much more money to maintain your lifestyle. You are spending more, so saving less. Remember, all spending is inflationary. So the Nike shoes will only increase in cost. Eating out will only get more expensive. Business class airfares will only get more steep. Lifestyle creep is always accompanied by lifestyle inflation. Your current high lifestyle spending has established a demand on your future income. So to retire, you must have much more money to maintain your lifestyle.

So, what must you do?

Ensure that your investments also increase. As income rises, don’t do the mistake of keeping your savings (which eventually are utilised to buy assets) constant. Let your savings also rise proportionately. The more aggressively you save, the less you spend since there is only so much extra money. The less you spend, the less goes in upgrading your lifestyle. The less you upgrade your lifestyle, the less pressure on future expenses.

Draw a balance. You don’t have to save your entire raise, neither do you have to spend it all. Upgrade only what really matters to you. Maybe you are perfectly comfortable in a smaller home, but like to splurge on vacations. Pick what stays constant, and what gets upgraded.

Remember this:

• Lifestyle Creep is perfectly normal.
• Lifestyle Creep is also accompanied by Lifestyle Inflation.
• Due to the above, current expenditure has a future monetary and psychological impact.
• Upgrade your savings too, not just lifestyle.
• Only upgrade the lifestyle aspects that matter to you.