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Overcoming Lifestyle Creep: A Guide for Australians
Lifestyle creep could be stopping you from getting ahead, but there are ways to beat it. (Source: Ben Nash/Getty)
Understanding Lifestyle Creep
Many Australians, regardless of their income, often find themselves feeling stagnant financially. This phenomenon is known as lifestyle creep, which subtly erodes wealth and undermines financial progress. It’s not just about indulging in luxury cars or overseas trips; it encompasses the gradual increase in spending that correlates with a rising income.
Currently, the average salary in Australia stands at $102,731 per annum—a substantial figure that may not translate into financial stability for everyone. The challenge lies not in poor financial habits but in unnoticed, escalating expenses.
Everyday Decisions and Lifestyle Inflation
When you receive a salary increase, it can lead to lifestyle adjustments that include moving closer to work, upgrading housing, ensuring quality education for children, and adding another vehicle. Every minor upgrade feels justified and becomes part of a new normal. While these choices are not inherently irresponsible, they often lead to a situation where increased earnings do not correspond to increased savings or investment.
A survey from Compare Club revealed that over one-third of Australians earning above $200,000 still live paycheck to paycheck, with 50% of their income consumed by bills. This isn’t merely a luxury issue; it’s a systemic problem.
Imagine receiving a monthly pay rise of just $200. While seemingly insignificant, if this amount were invested instead, over a decade, it could accumulate to about $39,558. If you maintain this habit, your initial investment could potentially grow to over $1 million in thirty years, simply by adhering to the average Australian stock market return of 9.8%.
The Hidden Costs of Lifestyle Creep
Lifestyle creep stealthily consumes your financial growth. It’s a cumulative effect of seemingly minor expenses that blend into your lifestyle, ultimately impacting your capacity to build wealth. Every dollar spent on lifestyle enhancements detracts from achieving significant financial milestones, such as saving for a home, generating passive income, or establishing an investment portfolio.
To combat lifestyle creep, there are two actions you can take that are both straightforward yet transformative.
Strategies to Combat Lifestyle Creep
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Establish an Automatic Savings System: Rather than relying on a single bank account and mental budgeting, automate your savings. Set up your finances so that a portion of your pay goes straight into savings or investments as soon as you are paid.
- Separate Your Day-to-Day Spending: Clearly delineate your daily expenses from your bills and savings. This ensures that your bills are handled without delay, and your additional earnings are allocated wisely rather than mindlessly absorbed into increased spending.
Implementing a structured savings approach doesn’t have to be perfect from the beginning. The key is to start creating a plan and refine it over time to optimise your financial wellbeing. When you link your financial goals to tangible outcomes—like saving for a property or reaching a specific investment milestone—every dollar will begin to take on greater significance.
The Path Towards Financial Freedom
Finding an extra few hundred dollars each month can lead to dramatic long-term financial shifts. This is not just about having an emergency fund or a safety net; it’s about transforming your financial future, paying off debts, establishing passive income, and achieving financial security.
When you perceive your savings as a foundation for your future rather than as postponed spending, saying no to distractions becomes much easier. Small financial wins today can lead to monumental outcomes down the road. The objective is to assign your money a purpose, leading to a mindset shift that propels you closer to your goals.
Conclusion
Lifestyle creep, though subtle, can significantly undermine your financial aspirations. It manifests as small, imperceptible changes that accumulate over time, robbing you of the freedom that comes with financial stability.
Earning more is commendable, but the real challenge is in retaining and utilising those earnings effectively. A proactive approach towards savings and investments can help you break free from the grips of lifestyle creep and pave the way towards achieving your financial objectives.
Ben Nash is a financial expert, podcaster, adviser, and founder of Pivot Wealth. His new book, "Virgin Millionaire," provides a step-by-step guide for financial success, now available on Amazon and as an audiobook.
Disclaimer: This article is general in nature and may not reflect your personal financial situation. Please consider seeking professional advice tailored to your needs.
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