The cost of lifestyle creep
Here’s the maths behind why you’re your own worst enemy.
I recently wrote an article on how double income households could move from treading water to building wealth. Part of this is being hyper aware of lifestyle creep, a condition that is difficult to reverse and claw back from once it has started.
First, let’s start with what lifestyle creep is and why it happens.
You’ve received a pay bump. Happy days. Finally – you’ll have enough extra cash to go to Europe this summer instead of Bali. You’ll swap out your home brand chopped tomatoes to Mutti. You’ll get the steak at the local French restaurant instead of the pub. Why shouldn’t you get these small upgrades? After all, you deserve it. Lifestyle creep is separate to cost of living. It is a lifestyle inflation rate that can be debilitating to wealth creation.
For many people, lifestyle creep is exactly that – it creeps. It is one small decision after another that upgrades your lifestyle. Once you’ve gotten used to something - and it’s difficult to give it up. Much of this is tied to expectations, and what your life ‘should’ look like.
I like to binge Dave Ramsay videos on TikTok, where ‘expectations’ are front and centre. For those that are unfamiliar, the basic premise is a financial adviser in the US has listeners call in, asking for advice on their financial situations. These financial situations are very different to the emails that I receive, which are usually around what to invest in, and how to structure your investments. His callers are almost always those that have allowed their lifestyle to be completely disconnected to the funds they earn.
Many of the calls are couples who have tertiary education (and the obscene debt that is attached to it in the US), a home and mortgage, and large household incomes. They’ve decided that because they have done the hard yakka to get the education and the six-figure income they deserve the house, two cars, holidays and possessions. They believe they deserve it all at once, and all immediately. The debt compounds, the situation worsens, bankruptcy becomes more and more likely.
These are extreme examples. Lifestyle creep can be dangerous for those of us that absorb our wage increases as they happen, as well.
This short exploration looks at the cost of lifestyle creep, and the opportunity cost for individuals.
The cost of lifestyle creep
You’re great at your job. You receive a promotion every two years that comes with a 5% bump. On non-promotion years your salary goes up 3% (roughly the Wage Price Index).
Using 2025-2026 tax rates, assuming no MLS.
*This is Morningstar’s long-run assumption for CPI
At the end of a five-year period, you’ll have $13,936 in extra money when adjusted for inflation. Say you invested just that amount for 20 years, you would have $75,712 adjusted for inflation. If you had a 3% increase in pay for the next 20 years, the savings would grow to $134,660 with a 6% annual return.
This is the technical cost of ‘mindless’ spending. Spending without realising it, or without a structure to guide you.
This is just a model. It is not real life. Life should never be about just saving each extra dollar that you earn for the rest of your life and maintaining the same quality of life. The best way to find balance is to properly define your financial goals.
A way to measure lifestyle creep
Your savings rate
For those earlier in their wealth-building journey savings rates are critical. High-income earners often focus on how much they earn and not how much they keep. People underestimate how powerful a high savings rate is early in life. Without saving money it is impossible to gain financial independence.
If you’re saving 50% of your income, you only need to fund one year of lifestyle with one year of work. That’s a powerful mindset shift. Measuring your savings rate year on year will allow you to understand how you are tracking.
Personally, I place a large focus on savings rates in my own investment strategy. I try to focus on what I can control. If I’m contributing $100 a week to my investments and I manage to save an extra $10, that’s effectively a 10% return. Managing your savings rate and making sure it’s sustainable over the long term can supercharge your wealth creation.
Why goals can help
Properly defining your financial goals mean that you understand all the inputs that go into achieving that goal – that includes savings. This allows you to sensibly plan what can be put aside for near term discretionary spending.
As you earn more or have more disposable income, you have the ability to adjust the levers to reach financial goals. If you can contribute more to your goal, you can reach it sooner. You could reduce your exposure to aggressive assets in your portfolio. You could swtich to a more ambitious goal.
If you don’t have financial goals, you can try to figure out one that you want to achieve, or set yourself up for the future regardless. What can also help is putting aside a set amount that you determine as forced savings from each increase. For example, for every increase you get, you may decide that you will put aside 30% for your future self and have 70% for your current self.
Our best resources on defining your goals
Buying a home out of reach? Try these financial goals instead. A framework to understand what you want from life and therefore your finances.
You’re also able to listen to the podcast on the above article below:
https://www.youtube.com/watch?v=U3cT3JiOSxg
Do you know why you are investing? New research from our Behavioural Insights team suggests that many investors should clarify what drives their investment decisions.
3 steps to uncovering your true financial goals. A process to help you identify what really drives you.
A checklist for financial fitness. We are constantly comparing ourselves to others but savvy investors focus on progress against goals.
How to define an investment strategy. Designing an investment strategy can be an expensive endeavour. Here is how to create one yourself.
Building a diversified portfolio to align with your goals and values. Like many things in life, working out where you’re going, where you’re at, and the gap between the two is critical.
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