How to avoid lifestyle creep when you get a pay rise - Diana Clement

You get a pay rise, but pretty soon money is just as tight as it was before.

THE FACTS

• Research shows lifestyle inflation often cancels out the benefits of a pay rise.
• Managing lifestyle inflation involves maintaining spending habits and focusing on saving or paying down debt.
• Awareness and planning can help break the cycle, leading to financial security and mental liberation.

It’s tempting to think a pay rise will solve your money problems. But research shows that lifestyle inflation, the gradual increase in spending that comes with higher income, often cancels out any extra cash. If you can break the cycle, or avoid it in the first place, you can turn a pay rise into genuine financial advantage instead of just extra spending.

The question arose in our house, with one of my offspring moving to a fulltime income. “Don’t fall for lifestyle inflation,” I told him. The fact that he even knew what lifestyle inflation is gave him a headstart on me at the same stage in life. That’s thanks to some unknown person around the end of the 1990s who coined the term for a concept that economists had discussed for decades.

Lifestyle inflation happens without us noticing it usually. You get a pay rise, but pretty soon money is just as tight as it was before. Some of that, of course, is inflation itself. But as most people grow into their careers, their pay rises increase by more than financial inflation. Next, you’re upgrading everything: groceries, clothing, toys, restaurant meals, house, car, holidays. The reverse is keeping your lifestyle the same and paying down the debt faster, or building up the savings.

Once you understand the concept, managing the lifestyle creep isn’t sexy. Even though you can upgrade everything, wealth can come from choosing not to. And that can be mentally liberating as well as financially.

Start by delving into how lifestyle inflation manifests in your life. Lifestyle inflation doesn’t necessarily come in big leaps. It’s little incremental changes. It might be $2 or $5 here and there.

My most recent example of succumbing to lifestyle inflation was with yoghurt. For years, I’ve bought Gopala yoghurt, which is several dollars cheaper than alternatives. When someone introduced me to The Collective brand yoghurts earlier this year, I was in awe, of all but the price. Soon I found myself in the supermarket thinking: “I’ll treat myself just this once”. That moved on to, “okay, I’ll buy it when it’s on sale”, and then finally one week when it wasn’t on sale it was “what the heck”.

Sadly, the little WTH voice that led to yoghurt creep is there with us all, saying: “I deserve it”. As well as the voice, there are subtle attitude changes that come with growing income. Case in point, when my last car came to a catastrophic end, I decided: “I want a nice one,” which meant in reality $12,000 for a hybrid, not $5000 that I would have spent in the past.

Multiply those lifestyle inflation splurges across everything we buy and no matter how many pay rises you get, money is always tight. It leaves us on what economists call the hedonic treadmill. That is a psychological concept that explains why when excitement fades over a pay rise and the new lifestyle becomes your new normal, your happiness settles back to where it was before. It’s like running on a treadmill. No matter how much faster you run, you end up in the same spot.

Getting off the treadmill requires awareness in the first place. That means spotting the creep, as I did with my yoghurt purchase. The next step is planning. Don’t leave purchases, small and large, to chance. Divvy up your income into spending and saving at the beginning of the month and work out which lifestyle upgrades fit within your budget, and which don’t.

Another step is to build in deliberate delays for purchases. For small items that could be 24 hours, and for large expenses, 30 days. It’s amazing how quickly the desire ebbs.

Make your progress visible. Set goals and track your net wealth. Review the progress regularly to create a positive feedback loop.

Try rewiring your reward system. If you buy too much stuff, or are prone to impulse buying, choose to treat yourself with experiences instead. Or choose non-material rewards such as learning, health and fitness, or spending meaningful time with others, over buying things to reward yourself.

Some people succeed in breaking free from the hedonic treadmill by adopting mantras, such as “I don’t need to prove my success through spending”. They can be very powerful.

Ultimately, resisting lifestyle inflation comes down to choice. Can you use your pay rises to build security rather than fuel spending.