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Lifestyle Creep - Are You Making This HUGE Financial Mistake? | Money Mistakes to Avoid - YouTube
Channel: Next Level Life
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I would argue that one of if not the biggest
financial issue the majority of people will
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face in their lifetime is something that is
rarely every talked about in traditional financial
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media.
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And no, the issue is not debt, it is not the
stock market crashing, it is not even something
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like getting laid off from your job.
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Those issues all can be very difficult to
deal with, but I would argue that there is
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another issue that may be even more damaging
to our financial futures.
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I鈥檓 talking about the phenomenon known as
lifestyle creep.
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Today I鈥檓 going to be talking about what
lifestyle creep is, why it occurs, what issues
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it can lead to if not properly managed, and
how to properly manage it in our lives.
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Hey everyone Daniel here and welcome to Next
Level Life a channel where you can learn about
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investing, debt, retirement, and many other
financial topics besides, because, let鈥檚
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face it, the school's aren't going to teach
it for us.
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So if any of those topics sound interesting
to you or if you want to learn how to better
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handle your money and have more financial
freedom be sure to hit that subscribe button
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and the bell next to my name to be notified
every time I upload a video.
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And if you want to further support the growth
of this channel you can check out some of
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the links I鈥檝e left down in the description
below which includes a 30-day free trial of
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Audible and 2 free audiobooks of your choice
as well as a list of some books on money I鈥檇
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recommend checking out with your free trial,
or you can smash that like button if you haven鈥檛
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already, share this video with a friend, and
leave a comment below letting me know what
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topics you鈥檇 like me to cover in future
videos.
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Lifestyle creep is something that most of
us experience throughout our lives to varying
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degrees and it is often one of the main causes
of some of those other financial issues I
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mentioned a moment ago.
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Lifestyle creep is defined in many ways, but
for the purposes of this video, I will be
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defining it as 鈥淎 situation where people's
lifestyle costs or standard of living improves
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as their discretionary income rises.
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Lifestyle creep occurs for a couple of reasons,
the first is because of inflation.
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Inflation, of course, is the phenomenon that
explains why $1 today doesn鈥檛 buy you as
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much as $1 did 30 years ago.
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So an apartment for rent for $900 today, may
be renting for $930 a year from now and as
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a result, the cost of raising (or even maintaining)
your lifestyle creeps upward over time.
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The second reason lifestyle creep occurs,
and the one that is less commonly talked about
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is when we willingly choose to increase our
standard of living by bringing more luxury
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into our lives.
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Often we鈥檒l find that as lifestyle creep
occurs, former luxuries soon become considered
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necessities.
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As a result, it can be difficult (though not
impossible) to bring ourselves back to a standard
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of living that we previously had after we鈥檝e
been introduced to the new, and higher, standard
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of living.
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And lifestyle creep can happen with just about
anything.
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It can happen on small things like the clothes
we wear, the food we buy, or our choice of
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drink at dinner to much larger things like
our furniture, homes, cars, and other potentially
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expenses luxuries or hobbies.
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So as you can imagine, lifestyle creep is
considered sinister for a few reasons, foremost
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among them is that it is so very subtle.
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As I said, most of us have experienced some
lifestyle creep in our lives, but since it
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usually happens so slowly over a long period
of time that we may not notice just how much
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of an effect it is having on our present financial
situations or our financial futures.
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Let me show you how this works.
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Say John is going to school year-round, full
time, and has a part-time job to try to pay
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for this educational and living expenses.
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He works about 20 hours a week at $12 an hour,
meaning that he earns roughly $12,500.
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As you can imagine he is living on an extremely
tight budget.
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He doesn鈥檛 own a car, he lives at home to
save money, and he still can鈥檛 afford to
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have many luxuries on that level of income.
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Maybe he goes out to eat with friends once
a month as his reward for doing so well in
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school, but to save money he never goes to
fancy restaurants and always orders water
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for his drink since it鈥檚 usually free.
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Then John graduates and gets his first full-time
job, where he now makes $15 an hour.
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That鈥檚 approximately $2,600 a month or $31,200
a year which to him probably feels like a
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ton of money after living on $12,500 a year
while in school.
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Even after considering taxes he鈥檇 be doing
better than before by pulling in about $2,300
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a month.
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And for his hard work, he rewards himself
with a new, or at least new to him, car to
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get to and from his job with maybe some nights
out thrown in for good measure.
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The car costs him $10,000, but he doesn鈥檛
have $10,000 so he has to finance it.
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The 5-year loan with a 4.5% interest rate
costs him a little over $185 a month.
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On its own, that鈥檚 not backbreaking.
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He鈥檚 got the money now after all and the
busing system where he lives is not good,
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so he needed some form of reliable transportation.
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However, the car loan is not the only new
cost that would have to be considered in his
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case.
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Since he didn鈥檛 have a car while in school
he will now have totally new bills relating
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to the gas, insurance, and potentially maintenance
on the car for a start.
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These costs will vary depending on a number
of factors but let鈥檚 assume, just for the
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sake of this example, that between all of
that he is spending an additional $250 a month
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on transportation costs.
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But that鈥檚 not all because living at home
with his parent鈥檚, or roommates is a drag
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and now that he has a job, he has the ability
to get his own place so he looks around and
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rents an apartment which costs him roughly
$800 a month once we add in all the utilities,
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insurance and other expenses associated with
apartments.
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Looking at his lifestyle before, John was
living on a shoestring budget of $12,500 a
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year or a little under $1,050 a month while
in school.
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He was living at home in order to save money,
just as many of us did by living with multiple
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roommates to save money in college and the
luxury end of his lifestyle was basically
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going out to dinner once a month.
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Since getting out of school he has added monthly
expenses of $185 for his car, $250 for other
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transportation expenses, and $800 for his
apartment for a total monthly budget of about
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$2,285 on a $2,300 after-tax income.
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In other words, John has officially entered
the rat race and is living paycheck to paycheck.
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And mind you, his standard of living hasn鈥檛
really even gone up that much, no seriously,
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because he has a total of $15 a month or $0.50
a day to actually go out and enjoy life after
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covering his expenses.
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That isn鈥檛 going to get you much nowadays.
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Sure he鈥檚 living on his own, and I don鈥檛
know maybe his parents were cramping his style,
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so that鈥檚 certainly changed.
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He鈥檚 able to drive now, except not really
because he can鈥檛 afford the gas and extra
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wear and tear on his car that, that would
create without plunging himself in even deeper
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debt and living on an even tighter budget
down the road.
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So maybe not that, but maybe he鈥檚 able to
go out to dinner twice a month now instead
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of once a month.
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But that鈥檚 about it as far as improved standard
of living goes.
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And that鈥檚 an unfortunate reality that many
Americans are facing today, they鈥檝e worked
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hard, put themselves through school (if they鈥檙e
lucky it鈥檒l have been done debt-free like
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John managed to do but statistically speaking
that isn鈥檛 usually the case), they get their
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job (hopefully), and a couple of expenses
(sometimes even the necessary ones) increase
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but they increase beyond what鈥檚 necessary
like we saw in John鈥檚 case and suddenly
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they鈥檙e living paycheck to paycheck.
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So what鈥檚 the solution?
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One might think that his future raises will
enable him to escape the rat race and that
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might be true depending on what career he
choose and how well he does, but if he鈥檚
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in a career that only gets him 3%-4% raises
each year, it鈥檚 going to be quite a while
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before that happens (especially when we consider
that inflation has averaged about 2%-3% per
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year historically) and eventually he鈥檒l
be hard pressed to save enough money for his
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eventual retirement.
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The solution, as I hinted at in past videos
is that we need to learn how to properly manage
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lifestyle creep.
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Because, contrary to what it might seem like
so far, I don鈥檛 believe that lifestyle creep
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is inherently a bad thing.
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It, like most things in life, is fine so long
as it isn鈥檛 used in excess.
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Cars are not bad, too much car is bad.
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Extravagant vacations are perfectly fine,
but too much too soon can be damaging to your
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financial present and future.
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There鈥檚 nothing wrong with lifestyle creep,
but too much of it is dangerous.
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Like I said in last week鈥檚 video, it isn鈥檛
really about how much you make or even about
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how much you spend, it the difference between
the two that matters.
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So how could John have better managed his
lifestyle creep from before?
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Well, as always he has several options at
his disposal.
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First, he could鈥檝e spaced out his lifestyle
creep instead of trying to take it on all
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at once.
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Assuming he wasn鈥檛 able to carpool with
someone, take advantage of some other form
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of ride sharing, or bike to and from work
for a little bit in order to save up money
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for better transportation he could鈥檝e stayed
at home for a little while longer in order
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to pay off his car loan.
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Judging by the numbers from the previous example
he would鈥檝e had $1,050 a month in living
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expenses due to living at home plus the $185
car payment and the $250 for other associated
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transportation costs for a total monthly expense
of $1,485.
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This means that he would鈥檝e had about $815
a month to put toward that car loan and would
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have it paid off, in full, in 11 months and
he would鈥檝e saved about $1,000 in interest
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over that time as well which is a nice bonus.
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Another thing he could鈥檝e done was find
some roommates that were willing to rent an
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apartment near his work which would lower
the cost of John鈥檚 transportation costs,
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if not eliminating them altogether and help
save him some money on rent.
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Say if John found an apartment within biking
distance of his work and got two roommates.
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The total cost of the apartment was $1,500
a month with utilities and the three split
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the costs evenly.
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That means John is paying $500 a month for
housing and, beyond possibly the initial purchase
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of a bike if he didn鈥檛 have one, or any
costs that may be associated with a bike ride
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sharing program he transportation costs would
be virtually nothing.
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This would leave John with monthly expenses
somewhere in the neighborhood of $1,550 a
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month, meaning he would have $750 a month
left over after taxes and expenses in order
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to invest for his future and have fun.
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Say if John wanted to retire at 65 and was
23 after graduating college.
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He wanted to live on $24,000 a year in today鈥檚
dollars when he retires.
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Assuming a 3% rate of inflation that means
his retirement nest egg would have to be about
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$2,075,000 once he鈥檚 65 if we鈥檙e following
the 4% rule.
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At an 8% average annual rate of return, John
would need to invest about $550 a month in
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order to reach his goal.
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Yet another thing John could do is to start
a side hustle to bring in a little extra money.
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Say John starts flipping things that he finds
in his local discount stores for a profit
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online which allows him to take home an extra
$500 a month on average.
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Assuming that John still went and financed
his car as well as moving out on his own he
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would at least have some breathing room this
time thanks to his $2,800 a month take home
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pay compared to his $2,285 a month in expenses.
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He could, as I suggested in last week鈥檚
video play his financial strategy both offensively
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and defensively by rent hacking with the help
of his roommates and starting his e-commerce
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side hustle.
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This would end up giving him $1,250 a month
left over after taxes and expenses to put
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towards his investments and his current enjoyment.
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Assuming his investment goals stayed the same,
he would have roughly $700 left a month to
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let his lifestyle creep up a little without
derailing his present or future financial
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situations.
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Maybe he can start going out to dinner once
a week with family and friends and get something
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other than water with his meal.
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Maybe he could go to the movies, on vacation,
or take part in some recreational activities
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like rock climbing or zip lining.
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Maybe a bit of both or he could decide to
put a little extra toward his investments.
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This would give him the possibility of becoming
financially independent earlier in life than
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normal without sacrificing his current happiness,
not to mention that over time those investments
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would gain interest which would give him some
small form of security in case something unfortunate
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happens with his living situation, job or
side hustle.
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Another thing that I feel John, could and
should do in any of these scenarios is to
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consciously pay attention to figuring out
what he truly enjoys spending money on in
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life because as time goes along he may find
some things that he is currently spending
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money on just don鈥檛 bring him that much
enjoyment and he can then start trying to
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figure out how to reduce or eliminate those
expenses, essentially reversing lifestyle
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creep!
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And those are just a few examples of what
John could do to better manage his lifestyle
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creep, but it鈥檚 by no means an exhaustive
list, so here鈥檚 where you come in.
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In the comments section below I want you to
leave some examples of where you have experienced
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lifestyle creep and how you can (or did as
the case may be) manage it.
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I鈥檓 looking forward to seeing your examples
and ideas.
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But that'll do it for me today once again
if you enjoyed this video be sure to smash
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that like button if you haven鈥檛 already,
subscribe, and hit that Bell next to my name
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uploads.
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I generally upload every single Monday, and
if you have a friend that would be interested
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in this kind of content be sure to share it
with them and let's really get this information
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out there and start our own Financial revolution.
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