Did you recently get a promotion or more pay?
Congratulations! It’s natural to want to celebrate by buying a new gadget, booking a vacation, or just enjoying having more spending money. But before you dive into spending, it’s important to take a moment to review your finances. If you don’t, you might fall into the trap of “lifestyle creep,” which can make it harder to reach long-term goals like saving for retirement.
What Is Lifestyle Creep?
Lifestyle creep happens when your everyday expenses start increasing along with your income. After getting a pay bump, you might find yourself spending more without even noticing.
It’s often subtle and hard to spot. Maybe you start buying more expensive wine at the grocery store, or you treat yourself to a café latte every morning on the way to work. Perhaps you begin upgrading your phone every year instead of every few years, or dining out becomes a regular occurrence rather than an occasional treat. Over time, these small changes can turn former luxuries into necessities. If you’re not careful with your budget, your spending can increase more than you might expect.
According to a survey by Aqua, 89% of people in the UK spend more on social activities each month than they plan to, averaging about £67 extra. When lifestyle creep affects other areas of your spending, it’s easy to see how your expenses can rise significantly without you realizing it. At first glance, spending an extra £3.50 on a coffee might not seem like a big deal. But if you buy that coffee three times a week, it adds up to almost £550 over a year! As your spending increases, you may become dependent on your higher income, making it tough to return to your old budget if needed.
How Lifestyle Creep Affects Your Retirement Savings
Those small increases in spending might seem insignificant on their own, but together they can add up to thousands of pounds each year. This extra spending can mean you’re putting less of your new income toward important long-term goals like retirement. Contributing less to your pension, investments, or savings can have a bigger impact than you might think, especially when you consider the potential growth of those investments over time. Plus, as your lifestyle becomes more expensive, you may need a larger income in retirement to maintain it.
A 2022 survey published in FTAdviser found that the top goal for people nearing retirement is to maintain their current standard of living. If your expenses have increased over the years due to lifestyle creep, your retirement savings might not be enough to support the lifestyle you want. This could lead to an income shortfall in retirement or the risk of depleting your savings too quickly.
Finding Balance with a Financial Plan
While lifestyle creep can pose challenges to your long-term plans, you don’t have to save every extra penny—you just need to find a balance that works for you. Maybe you want to plan a special holiday or enjoy more outings with your family. By including these expenses in a thoughtful financial plan, you can prioritize what’s important to you without jeopardizing your future.
Consider which expenses truly bring you happiness. For example, grabbing a coffee on your way to work might be a habit that doesn’t add much joy to your day. On the other hand, meeting a friend for coffee might be a meaningful part of your social life that you value. Being aware of lifestyle creep isn’t just about cutting back; it’s about being intentional with how you use your money now and in the future.
