Wallet Hacks

How to reverse lifestyle creep

Lifestyle creep is sneaky. That's why they call it creep. They don't call it a lifestyle EXPLOSION… if they did, well, you'd probably notice an explosion right? 🙂

A couple weeks ago, I'm emailing with a reader (Edward) about his biggest challenge (I ask everyone who signs up to our newsletter for their biggest challenge) and his was lifestyle creep. He wanted to save more but, in looking back at his spending, felt like his lifestyle had crept upwards without him even realizing it.

Fortunately, lifestyle creep can, to some extent, be reversible.

What is lifestyle creep?

Lifestyle creep just means you're spending more and more of your surplus cash flow. You take in income, you pay out your expenses, and the rest is surplus cash flow.

It's most common in folks nearing retirement as your previously fixed expenses start disappearing – a mortgage, a car loan, kids graduate and move out (hopefully!), etc. We experienced a boost in surplus cash flow this Fall when our oldest went to Kindergarten, which ended his daycare expenses.

While it's most acute nearing retirement, it happens throughout your adult life too. You get a bonus or a pay raise, you start spending some of it.

But some lifestyle creep is healthy and natural.

If you are single, have no kids, and rent a small apartment – you'll have relatively low expenses. You're feeding one mouth and living in one bedroom.

If you get married, have kids, and move into a house – your lifestyle will be more expensive. But you're feeding more mouths, living in more bedrooms, and it's unreasonable to think that this “creep” can be reversed so you spend as much as you did as a bachelor.

Today, we're only going to focus on lifestyle creep that doesn't play a meaningful role in your life. Your lifestyle may have gone up, but you don't appreciate what you're getting for the extra money, and now you look at your budget and it's maxed out.

That's the lifestyle creep you should be eradicating.

It's NOT about restriction

Sometimes we need to cut expenses because life is a series of trade offs. If you want to buy a new house, you need to come up with a down payment. You can earn more money or spend less or wait longer to buy that new house. It's your choice.

When you battle lifestyle creep, it may not be obvious what has crept up. You haven't actively made those choices and that's a bad thing.

It's about tradeoffs

Reducing lifestyle creep isn't about restricting your spending for the sake of lowering it. It's about making trade offs so that you save (and then spend) where things matter.

Do you want to retire a year earlier or go on an extra vacation a year?

Do you want to be able to help your kids with college or buy a nicer car?

Since we can't have everything, it's about actively making choices so we pick – vacation or retire earlier. There is no correct answer.

The only mistake is to not actively participate in the decision.

Identify and reduce what's meaningless

This is a two step process:

To know what to reduce, you need to identify everything you're spending money on. Your cable & internet, SiriusXM satellite radio in your car, your gym membership or your magazine subscriptions. The simplest way to do this is with a full accounting of your expenses.

The best way to find these is to use budgeting software that tracks your expenses. You can use Mint or Personal Capital (Personal Capital Review) to quickly see what your monthly fixed expenses are.

Now you have a list — it's time to separate them.

I separate lifestyle creep expenses into two categories:

Higher Than You Need

These are expenses that you need but that you're currently overpaying for with respect to their value to you.

The best illustration of this is heating your house. Let's say you're comfortable with the house being 70 degrees F. Would you say that you'd also be comfortable at 69 degrees? 68 degrees?

There is some set point at which your comfort becomes an issue. If you lower your thermostat by one degree, the general rule of thumb says you can probably save around 3% on your heating bill. Same goes for AC.

The exercise here is to look at your expenses and try to find the excess expense. You need heating and air conditioning, but are you paying for too much of either?

Let's look at a very common expense – the gym membership. Gym memberships, on the face of them, are positive. You get access to equipment, you can build strength and stamina, and you don't have to maintain or store anything.

They love the gym.

They're great if you go. But plenty of people have memberships but never use them! I see this first hand when gyms are packed in January and part of February, before returning to normal by March.

If you have a membership, start keeping a record of how often you go. Then calculate how much each trip is costing you.

If your membership costs $100 a month and you go 20 times a month, that's $4 a trip.

If you go 5 times a month, that's $20 a trip.

Aaaand if you go 0 times a month, that's dumb.

Are you overpaying for the gym? Your usage rate will dictate that.

Once you've identified these, you can take steps to reduce them with confidence because you know you're overpaying.

Higher Than You Realized

We get busy and the things that are less important get put on the back burner. We frequently pay for subscriptions and subscriptions get renewed, often for slightly higher.

The boiling frog is a story about a frog being slowly boiled alive. If you drop him in a pot of boiling water, he'll jump out immediately. If you put him in cold water and slowly increase the temperature, he'll sit in there until he's boiled alive. Who knows how true it is but you get the metaphor.

You have a lot of expenses that made sense when you signed up. Over time, as prices increased and you didn't notice, they got higher and higher to the point that you might not sign up if given the option today at the present price.

In many cases, you should use a company's profit motive against them by trying to get promotional pricing each time you sign up. You can do this with nearly anything that has a contract. It's best if there is healthy competition but ever service is competing against being cancelled entirely. Comparison shopping is a must for all subscription based expenses.

The best part about this exercise is that it's the opposite of other money saving exercises. Many other ways to save money involve a lot of work for a little return. By negotiating contracts or cancelling them entirely, you do a little work and get the savings throughout the year. That's a better to do it!

Cut cut cut

Now comes the hard part — with a log of your monthly expenses, identifying which ones are good (fine the way they are), which ones have creeped too high, you need to take action.

Cut or renegotiate lower.

You need to make an active decision on your spending and this forces you to actively decide.

What If You Just Like Nicer Things?

Renegotiating and cutting your expenses that have creeped up is relatively easy.

What if you just like nicer things? What if you would rather fly on an airplane than drive? What if you like going to nice restaurants and ordering an appetizer, entree, dessert, and wine?

This is a more pervasive concept of lifestyle inflation and one that's harder to identify and combat… but it's very possible.

Whenever we visit my parents on Long Island, we fly. It's a 45 minute flight or a 5-6 hour drive. With two young kids, flying is by far the better choice but it's more expensive. We can afford it, in part because we have Southwest Airline's Companion Pass, so this is our preferred method.

If you want to reduce that type of lifestyle creep, I recommend listing out all the “nice things” in your life in priority order. Then reducing the lowest priority items.

For example, we can't give up flying to Long Island, especially during the holidays when driving a car can be brutal. We can, however, give up how often we eat out at restaurants.

In fact, we've done this (partly as a function of having young kids) and replaced it with cooking more at home. We've gotten better at cooking, we still get to eat delicious food (that's lower in salt, sugar, and fat!), we save money, and it's at a schedule more conducive to our lifestyle.

It's hard to cut something entirely from your life, that's like a smoker going cold turkey. But you can reduce or replace that spending (which is a habit after all!) while still retaining what you enjoy about the process.

Have you been struggling with or battling lifestyle creep? What has worked well for you?