I was sitting at the dinner table with my buddy Nick in Colorado last month. He was telling me a story about the stellar sales year of one of his direct reports. Lets call him Tim. His base salary was around $60,000 per year. The bonus from his terrific sales numbers was $50,000. That’s a hell of a bonus for a 24 years old. 

Tim approached Nick and asked about how he should spend the money. Nick, being an investment conscious thirty year old, recommended he take the money, enjoy $5,000 on some frivolity, bank the rest and forget about it. Tim responded that he has been eying a new Ford F150 Raptor and thought this was a good time to pull the trigger. He explained that the girl he was dating thought it was a really cool car and encouraged him to make the purchase. Nick explained how $45,000 in the bank today would grow to a huge number in 40 years and encouraged him to think through the long term. They said their goodbyes at the end of the day and went their separate ways. 

The next day, Tim drove into the parking lot in a brand new, bright blue Ford F150 Raptor.

He explained to Nick that he had worked extremely long hours over the past year and “deserved” and upgrade. The Toyota Corolla he had driven for the past four years was too cramped and did little to impress his customers. He thought his sacrifices had earned him this shiny new purchase and that it would help him impress clients (and his girlfriend) going forward. 

Tim is a victim of lifestyle creep. 

Lifestyle Creep

Lifestyle creep occurs when disposable income rises and items that were previously considered luxuries instead become necessities. A sense of entitlement creeps in. A rare indulgence becomes a regular right rather than a choice.  

As that income increases so do the costs. The house gets bigger, the car is upgraded, and food expenses increase. So while income rises, costs keep pace, so the amount of saving stays roughly static.  

There is nothing wrong with enjoying an indulgence. But as each indulgence is adjusted to it begins to feel normal, making it physiologically harder to backtrack.

Moving into a bigger house initially feels like a boon. But the size makes it difficult to maintain. Before long a maid is brought in to help with the housework. Then a gardener is hired to manage the landscaping. Before long, that new raise is consumed by a new cycle of spending, sacrificing the potential savings.

We’ve talked before about the pitiful 7 percent savings rate for the average American. This is not because salaries are stagnant. It is because when disposable income increases so too does the scale of consumption. 

The good news is the first step to combating lifestyle creep is to be aware of it. There are also some strategies to consider that will keep spending roughly static when incomes rise. 

Keep housing costs to 10-20 percent of spending.

Housing cost is the largest expense for most Americans, accounting for around 30 percent of annual spending. Because it takes up such a large percentage of spending, savings in this category add up quickly. 

Take my own example. When I moved to Shanghai in 2009 I began a housing search. I was an intern at the Worlds Fair in Shanghai and was looking for a modest apartment in a nice location. I ended up finding a 200 square foot loft with a shared bathroom. After some back and forth I negotiated a rate of $270 per month. It was in an excellent location but by all accounts a grim living situation. The walls would rattle at night with the scurrying of the mice. The pollution settled like a thick, constantly replenished layer of volcanic ash. The shower was outdoors and miserably cold in the winter. 

But despite those challenges it was inexpensive. 

Really inexpensive.

The savings from the house allowed me to maximize my disposable income. The average rental cost in Shanghai is over $1000 per month, I paid around a quarter of that. Over the next six years before I moved to Beijing my rent rose at around 3 percent each year. Lets take a look a those numbers.

That’s almost $70,000 savings when compared to the average cost in Shanghai. Real money.

 Because housing is such a large component of overall spending, savings there add up quickly. Coffee, which was also previously a problem for me, saves about a thousand a year with drastic cuts. An important change that adds up over time, but those savings are not even in the same ballpark. 

The thing about living in modest accommodations is that you adjust to it. However, it is much more difficult to move from a large comfortable accommodation to one that is more modest. There is a psychological loss that comes from that adjustment. 

Live in modest housing as long as possible to extract maximum benefits. Focus on the numbers. The average American spends 30 percent of income on housing. Cut that to between 10-20 percent and major savings will result. It need not be a situation like mine. Instead, live with a roommate. That can offer near identical savings in a larger, more comfortable space. 

Plan for increases

If work is going well and targets are met, a promotion or raise might be on the horizon. Without counting chickens before they hatch, it is prudent to have a plan for a salary that increases from $60,000 to $90,000. 

An additional $20,000 a year (after tax) in the bank is not insignificant. But just watching it sit there may lead to temptation, best to have a plan for how to deploy your extra capital.

One good rule of thumb is to save 80 percent of all increases over the original amount, leaving 20 percent for discretionary spending. In the example above, that means an additional $16,000 each year to savings, and $4,000 for the perfect vacation. 

Set specific goals

Just like budgeting allocates limited resources to specific categories, saving for specific goals is a way to set a target and measure the results. 

For me, I save a big portion of my salary each month in a high yield savings account. My goal is to buy a new house at the end of the year. I can see the money grow and watch the interest accrue. Over time, the feeling of looking at that interest build on itself if as satisfying as any temporary indulgence. Pulling the trigger on the new revenue-generating property will be even better.

Develop a support network

Tim’s story above includes a component common to many who suffer from lifestyle creep. His girlfriend was not only supportive of more spending, but actively encouraged new and larger purchases. 

Better to surround yourself with those who can at least accept your financial goals.

Limiting lifestyle creep might mean eating out a little less frequently or having friends over for drinks at home instead of at the bar. If all of your firend’s idea of a good time is $200 sushi dinners and $15 drinks at the club, it will be difficult to reign in your lifestyle. 

Real friends will understand your goals and wont make you feel bad for skipping the more expensive experinces.