Too lavish for your own good? Seven steps to beat lifestyle creep

The idea that it’s best to act quickly after getting a pay rise is backed by science.

Nobel Prize-winning economist Richard Thaler asked participants in a 1998 study to commit to saving an extra 3 per cent each time their salary increased.

The participants worked at a midsize manufacturing company. Those who participated in the scheme increased their savings rates from 3.5 per cent to 13.6 per cent over 40 months. And while those who chose not to participate were already saving more on average, at 6.6 per cent, by the end of the experiment, they were saving 6.2 per cent.

“This is a great example of how slow, regular increases to savings rates over time – rather than making an initial large sacrifice – will result in large gains,” says financial planning academic and behavioural researcher Campbell Heggen.

Of course, these sorts of plans only work if the savers can actually afford to put aside more, Heggen adds.

If your pay rise is lower than inflation, it’s not so much lifestyle creep, as just the cost of living.

If you’ve already missed the opportunity to bank or invest a pay rise, here are some tips for regaining control.

1. Track your spending

The first thing financial adviser David Currie of Wealthy Self tells clients who don’t know where their money is going, is to understand their cash flow.

“We data feed their bank accounts onto a central platform, and it basically spits out in real time how much you’ve earned and how much you’ve spent, and exactly where that’s gone,” he says.

This can also be done by simply going through your transactions over the last couple of months.

2. Identify laziness or overindulgence

Now you’ve done the digging, it’s time to analyse it. “We might get home and place an order on The Iconic without thinking, or we might pop out for drinks and dinner without thinking about the budget, and that’s more than $100 in the hole if you’re living in Sydney and Melbourne,” Edwards says.

“And we don’t necessarily think about it – have you actually had a better experience than you would have, if you’d just gotten a bottle of wine and had it at home with your friends?”

While spending on nights out isn’t necessarily bad, it’s a problem if you’re repeatedly splurging without realising, says Jessica Brady, a financial adviser and founder of the online financial literacy program The Greenhouse.

Brady gives a personal example.

“I spent an enormous amount of money in my early 20s. I worked in the financial services industry which was full of people who had come from very wealthy backgrounds, and which I did not,” she says.

“I wanted to feel like I fit in. I bought an enormous amount of clothes. I bought a pair of Chanel earrings to celebrate paying off credit card debt.”

Heggen agrees that the people we spend time with can be just as much a trigger for lifestyle inflation as an increased income.

“We are inclined to match our lifestyles to those in our social group,” he says.

To combat this, Grady suggests going through your transactions and giving them a rating, measuring them on how much value you got from it, whether you would spend that money again, and how aligned that spending is to your broader ambitions.

Lifestyle creep doesn’t always mean stereotypically “frivolous” spending, Edwards adds. It can be spending a bit more at the supermarket – beyond inflation -- or being overly generous when going out with friends.

Or choosing a more expensive physio or gym because it’s in a more convenient location. Or grabbing a cab in the morning rather than getting up early enough to catch the train. The list goes on.

3. Set goals

Now it’s time to ask, is this really the best way to spend my money?

If you’re not sure, it’s time to figure out your goals.

“We want to have great goals,” Brady says. “And they need to be goals that you’re willing to fight for – goals that you’re willing to say ‘no’ to other things for. Basically, what do you want to do with your one big life?”

4. Devise a plan

Angus Dockrill of financial advice firm IMFG says one of the most powerful changes is to shift your mindset from automated spending, to automated savings.“Commit to a regular and automatic savings plan,” he says.

“Save the first x per cent or dollar amount from your take home salary.

“For example, if you currently earn $8000, net of tax, per month and find that you generally spend what you earn from pay cheque to pay cheque, commit to saving $400 per month.

“Automate that savings plan to be direct debited from your bank account on day one of your pay cycle, or have your employer pay it into a separate bank account that you don’t see.”

Brady says it can be helpful to have spending buckets. For example, if fashion or travel is something you like to spend money on, find a bank account that doesn’t charge high fees and open a new account. Deposit a regular amount and use it to fund that part of your lifestyle.

5. Mind ‘comparisonitis’

It’s all well and good to have a plan but sticking to it can be harder, especially in the age of social media.

A study by American Express analysing spending behaviour in August found more than half (55 per cent) of Australians surveyed believed that unless they posted their travels on social media, they didn’t happen.

Additionally, 37 per cent of Millennials and Gen Z respondents said they were interested in dining at restaurants if they were “trending”, while 30 per cent of Gen Z respondents said they were treating luxury purchases, including handbags, jewellery and shoes, as a “financial investment”.

Dockrill says as soon as luxuries are considered a must, you’re in lifestyle creep territory.

And whether they’re luxury purchases or Instagrammable holidays, “comparisonitis is infectious and insidious,” Brady says.

She suggests unfollowing your favourite brands on social media, and unsubscribing from mailing lists.

Then, open up a separate email account where you can direct those emails. That way, when you have the cash ready to spend, you can check out that second email account for any sales or discount codes you may have been sent.

6. Don’t forget mundane expenses

But combating lifestyle creep doesn’t only have to be about eschewing coffees, holidays or gorgeous handbags, especially if those are forms of spending that matter to you, Currie says.

Bear in mind how to get the best deal on necessary expenses, he says.

Currie says he recently looked at his car insurance paperwork and realised they were proposing a 24 per cent increase to his premiums, while reducing his cover. He researched alternative insurers, called up his insurer and threatened to leave. They chose not to increase his premium.

Currie did the same thing with his bank earlier this year, and had them slice 0.5 per cent off his standard variable rate.

“It only took me 10 minutes on the phone,” he says.

Such savings are one way to simulate a pay rise, Heggen says. For example, if you’ve cancelled several subscriptions, renegotiated your home loan and your mobile bill, add up all of that money saved, and put it toward your regular savings.

7. And leave room for fun

The final rule, says Edwards, is to leave room for fun.

“What it comes down to for me is your own values, and where money is going to have the best impact for you,” she says.

“The more we embrace that we can have anything we want, but not everything we want, the easier it is to discern where our money is best spent.”