Lifestyle Creep: How to Avoid Inflation (and My Costly Lesson!)

Before the first paycheck even came, I let my new upgraded lifestyle creep in. A fresh new suit, tailored to fit me, and a MacBook, as all the techies used. In 2010, I nearly doubled my income. I lucked into a hot new job in the big city. But, this isn’t a story about income.

This is a story about how lifestyle creep, burnished in one seemingly small decision, can have serious long-term effects on your wealth. Lifestyle creep is the increased discretionary spending that often comes with increased discretionary income. Before I can explain how this one lifestyle decision had such an effect, you should understand how I lived before this lifestyle inflation…crept in.

My History of Housing

Since 2002, I’ve lived in:

• A dorm with no A/C in undergrad
• A dorm with A/C in undergrad
• A shared fraternity house with three other guys and their girlfriends during undergrad
• A friend’s living room while trying to start my first business after undergrad
• An apartment in the city with Jenni
• A little house outside the city with Jenni
• Nicaragua, under a tin roof, with the Peace Corps (free rent!)
• My parents’ house after the Peace Corps
• An apartment with Jenni
• A Big City Apartment while working as a Big Important Person
• An apartment with Jenni and a friend after I left my career path
• Our current house together

That’s a lot of moving! The last bullet point, our current house, has been home for the longest by far—about 7 years. It’s also the first house we decided met the buy criteria of buy vs rent and invest. Still, it’s far from the most expensive housing I’ve had. You see, when you’re a Big Important Person with a Big Fancy Job in the Big City, you lease a Big Expensive Apartment.

In reality, that apartment wasn’t very big. It was just expensive. Why would I do such a thing?

Lifestyle Creep and Your Self-Image

I rented that expensive apartment for the same reason we humans go out and buy fancy new clothes—so we can dress our new part. Or drive flashy new cars—so we can be perceived as cool. We seek to elevate our status. In the eyes of others, we want to be like them. We want to fit in. Frugality isn’t top of mind, we’re too concerned about looking cheap vs frugal.

I’ve never really had any complaints about where I’ve lived. My living situation has never felt unsafe. Even in Nicaragua, I had access to freshwater, a roof, and some way (a bucket) to stay clean.

With the move to a high powered city and a big income jump, I felt like a fish-out-of-water. The new role gave me some concern about developing imposter syndrome before I even had a day on the job. I had a degree in an unrelated liberal arts field. I was self-taught and this was a demanding technical position. Was I even qualified?

Shopping for the sort of apartment someone that I envisioned in my position would have, made me feel a little more like I could do the job. Having a tailored suit did the same. Surely I could at least look the part! It was a lifestyle creep powered by a lack of confidence. Eventually, I committed to a new lifestyle. I let my comparison of others dictate the self-image I wanted to project. Eventually, this comparison became a thief of joy in my life.

Growing expenses

I hunted someone down with the help of Craigslist and a few coffee meetups that would split an apartment with me. We worked through a list of apartments and settled on one of the most expensive. We lived there for two years. I still have that list of apartments and the least expensive was nearly half the price.

I’ve always had a roommate. That means, my expenses have never been more than half the housing cost. When you review the chart below, just remember to multiply by two in order to grasp just how expensive the apartment was from 2010 to 2012. And no, that doesn’t include utilities.

On average, my individual housing cost has been $839.94 per month since leaving undergrad. If I were to remove the period from January 2010 to January 2012—where I was Very Important—the average monthly cost would be $733.84. During this period, I spent $1,446.79/month on average—$712.96/month more than my $733.84/month average ignoring this period. In just two years, I blew $17,823.93 in housing costs above my average housing expense.

Opportunity cost of lifestyle creep

During this period, I had a relatively high income, lived well, and invested about half my income. Had I, instead, rented inline with the average housing cost I simply would have invested the difference. The $712.96/month expense from January 2010 to January 2012 would have been invested in a total US stock market fund like VTSAX. So, what would the value of those investments be today? Take a look at the table below.

By January 2012, I would have had an additional $18,988.96 invested in VTSAX. As of May 2020, that would be worth a whopping $51,877.84¹—enough to cover our entire annual FIRE budget for more than a year!

How do you avoid lifestyle creep?

Like any inflationary animal, lifestyle creep occurs slowly, silently. It grows in the background of your life. It can be kicked off by a salary raise giving you more discretionary income. Moving to a new place might mean keeping up with a different set of Joneses. In my case, it was both. How do we prevent this?

• Monitor your expenses over time, so you can identify trends in your spending
• Think about how you lived before your new job or raise, were you happy with your lifestyle then?
• Pay your future self, first: savings and investments towards financial independence give your future you, freedom
• For larger savings goals like a downpayment on a house, a wedding, or replacing your very beat-up and thoroughly used car—set transfers to separate goal-oriented savings accounts to occur right after your paycheck is deposited and automate your finances
• Practice Conscious Spending²: set aside a specific amount of money to reward yourself and have fun, then spend it!

Remember that the thing you’re buying with financial independence isn’t nothing: it’s time. You reduce spending because of how you set the value of time in your life.

Confidence and Lifestyle Creep

The point of this analysis isn’t to needle myself for having a luxurious downtown apartment (okay, maybe a little). Rather, it’s to make such decisions with eyes wide open. Lifestyle creep creates this sort of hazy memory as you let expenses slowly rise, sneaking in unnoticed. Do you know what else goes with a Big Fancy Apartment? Expensive clothes, fancy shoes, lavish dinners, rich bar tabs—but that’s all another story of lifestyle creep, for another time. Needless to say, my lifestyle inflation included more than just a fancy apartment.

It’s been less than nine years since I left that beautiful apartment, but I can’t say I recall many of the details. There was a pool on the roof, and of course a gym. I used them both a handful of times. However, I would notice an extra $52K in our FIRE fund.

Now, with plenty of money to live a very fancy life, and plenty of confidence from years of success in my profession, we happily live a more minimalist life. Confidence won out, kicking lifestyle creep to the curb. In fact, all that mattered was having the walkable city lifestyle we so desired and that we could clean ourselves with something a little better than a bucket.

FOOTNOTES

1) Calculation: $10,000 invested in VOO 01/03/2012 with dividends reinvested yields $27,320.83 as of 05/18/2020. $18,988.96 multiplied by (27,320.83/10,000) equals $51,877.84. VOO is a good substitute for VTSAX where data is unavailable. [VOO DRIP calculation source].
2) One day, we’re going to have to write about Conscious Spending here on TicTocLife. For now, just understand it as a concerted effort to budget for the things you want, that you enjoy, and to understand how those things are valuable to you. And then to spend it! As far as I know, Ramit was the originator of this concept.