Lifestyle creep, or lifestyle inflation, occurs when items you once considered luxury become necessities.
Just like the phrase implies, lifestyle creep starts to impact your life slowly, over a span of time. Often, without you realizing it.
It could be adding a few premium channels, upgrading your car, or moving to a new apartment or house. All of a sudden, you're spending more when you're booking hotels and flights. The idea is, you've increased your monthly fixed costs without a direct need for it.
Lifestyle creep occurs typically when you see a bonus or pay raise on your horizon. You may think, "Great, I'll be making an additional $10,000, once the pay raise goes through!" This type of thinking doesn't account for taxes you'll pay nor does it put in perspective what you'll actually take home each pay check.
If you were to downgrade your lifestyle after getting used to all of these new luxuries in your life, then you will feel like something is being taken away from you. It surely won't feel good.
Some dangers of lifestyle creep:
New "necessities" will increase your cost of living and make it harder to prepare for hardships
If you plan to carry these new costs over to retirement, you'll have that much more to save when planning for retirement
You're more likely to experience lifestyle creep in the future by making lifestyle creep part of your financial habits
Tips to avoid the creep:
Keep up with your budget. Use a paycheck calculator or ask HR for your periodic pay raise breakdown to be able to include the correct amount in your budget
Be mindful about committing to any increased costs. Ask yourself "Do I really need this or can I live without it?"
Periodically review your fixed costs and get rid of anything you don't use or need.
