The Lifestyle Creep Trap

It is natural to upgrade your lifestyle when income increases. It is also normal to spend more when you earn more. But don't let it be at the cost of your financial freedom

- LARISSA FERNAND

Sometimes I see individuals live lavishly, supported by their current income. However, they pay absolutely no heed as to whether such a lifestyle can be maintained when the cash flow subsides. What if they lose their job? What happens when one eventually stops working? How does the lifestyle adjust to the new reality? Will they be able to claw back on their lifestyle? As people earn more, they upgrade their lifestyle. On the face of it, there is nothing wrong. But the psychological impact of that upgrade and the financial ramifications are huge.

Over a decade ago, American financial advisor and planner Michael Kitces began educating people on this subject. I remember his mow-the-lawn example. I used to mow the lawn, but now I got a little more money. So, I'm going to pay someone to mow my lawn. Once I pay someone to mow my lawn, I rarely go back and mow the lawn again.

We do it with cars. The more expensive car becomes your price point. Once you are associated with a luxury car, it's hard to go back to a "lesser" model. Similarly, once you buy a new car, it's difficult to buy a used one again. Or maybe, even the number of vehicles in the family. Or the fact that you have a driver.

We do it with houses, too. When you stay in a 3-bedroom house, you would not want to shift to a 2-bedroom one. When you stay in a particular locality, you don't want to shift to a lesser elite address.

We do it with all aspects of our life. Eating out is now fine dining; you only drink imported wine and beer; only branded wardrobe; the latest iPhone; a Rolex; vacation abroad.

This is "Lifestyle Creep". The income supports this ascent up the social ladder, while investments stay at a meagre constant. You are saving less because your spending is high. Yet, it is this spending that has established a demand on your future income. So to retire, you have to have the money to maintain this lifestyle.