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Lifestyle creep can compromise a financial plan

How often do you think about inflation? While it has not been a hot topic in the US over the past decade, most individuals know that inflation refers to the general upward price movement of goods and services over time. Our first lessons on inflation typically come from the University of our Grandparent’s Lap in the course Back in My Day 101. For the latest lessons, you will find mutual fund companies and investment managers showing how much milk you could buy in 1928 compared to spending the same amount today. One of the core reasons why we invest is to protect our savings from losing its purchasing power to inflation over time, so we can maintain our standard of living without having to work additional jobs in retirement. Like most macroeconomic concepts, we have no control over this force and the faster we are comfortable with this, the better off we will be. Although, there may be one specific type of inflation which is much more personal to each of us, and one where we might have some control.

Hulu’s latest marketing campaign is centered around the premise of “Better Ruins Everything”. The commercials feature celebrities and athletes cautioning viewers how first class flights, walk-in closets, king size beds and even putting bacon on your burgers make it impossible to ever go back to the old way. They then spin this into how subscribing to Hulu will ruin how you watch television and use a bit of reverse psychology to warn you not to buy their product; weird flex, but okay. I commend Hulu for putting a spotlight on a common personal finance pitfall, referred to as Lifestyle Inflation. The main principle is that once you decide to upgrade a part of your life, it becomes the new standard and thus raises your spending floor until the inevitable upgrade in the future.

Lifestyle inflation (or lifestyle creep) is a huge threat for individuals in the early and mid-career accumulation stage of their financial lives. It spawned the phrase ‘Keeping Up With The Joneses’. Maybe it’s not first class flights, but instead it is membership into the local country club. Or maybe it’s not expanding to a walk-in closet, but it’s the decision to get a second vehicle. I will say no bad things about bacon because everything is better with bacon.

How does lifestyle inflation begin?

Let’s take a ride down Memory Lane. Can we remember our very first paycheck? How about our first raise or bonus? What did we do with that money? Now, a great response would be “invested it into a diversified portfolio” or “purchased shares of Berkshire Hathaway stock”, but the likely answer is “bought some stuff”. The follow up question would be – how much of this stuff do we still have today? I would assume very little to none. Lifestyle inflation first pops up the moment we purchase an item or service ‘just because we can afford to’. These days, in our on-demand and subscription based economy (the subscription e-commerce market has been growing by more than 100 percent a year[1]), spending money has never been easier.

How far could it go?

If you have ever felt like the outflows in your cash flow were moving at a faster pace than expected, you are not alone. Many Americans lack the available savings and would need to turn to a credit card for an unexpected emergency[2]. This is not just a problem among lower income individuals. If you work in a big enough company, I can all but guarantee that there is at least one person in your dream job, earning what you consider your dream salary, and yet, still lives paycheck to paycheck. There was a viral piece a few years ago that showed how this could happen[3].

What are some ways to avoid this creep?

Nevertheless, this is not a post to preach about why you should think twice before you enjoy your Starb