Don't let silent spending shifts swallow your income gains. Here's how to outsmart lifestyle inflation
What's tricky about lifestyle creep is that it often starts out really small, feels normal, deserved, and even inevitable, yet is not at all like reckless spending.
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A promotion, raise, closing a new retainer client or a sudden windfall often leads to a bigger paycheck. Soon, machine coffee might be replaced with a cappuccino from that fancy café down the road, home-cooked meals will be replaced with fancy dining experiences, wardrobes will get upgraded, and your car will start to feel old. And all these subtle upgrades feel deserved, a natural next step to a better life. After all, everyone around you seems to be doing the same. However, a year later, your bank balance tells a different story; you are feeling financially stretched, despite the income boost. This is lifestyle creep, a subtle financial trap that can undermine even the most promising earning potential. It's not dramatic or headline-grabbing, but if unchecked, it can derail your financial future.
Lifestyle creep, also known as lifestyle inflation, occurs when your standard of living rises with your income. Wants become needs, treats become habits. One-off indulgences, such as fancy dinners or designer brands, can transform into everyday expectations, subtly but significantly swelling expenses. From minor upgrades, such as organic groceries and additional content subscriptions, to major upgrades like phones, cars, or even homes, lifestyle creep occurs when yesterday's luxury becomes today's necessity.
Lifestyle creep has always existed. As one advances in their career, wanting a better version of everything is natural and, to a certain extent, justified. So why discuss lifestyle creep now? In stable economic times, lifestyle creep can go unnoticed. But when economic tides turn, consequences become painfully visible. We are living in an era of an economic landscape that is seeing tectonic shifts, and there are three primary reasons.
One, the belief that each generation would do better than the last, and incomes would consistently increase, no longer holds. Incomes have plateaued, and in some economies, even declined in real terms. Inflation erodes purchasing power, and housing costs surge. The Periodic Labour Force Survey (PLFS) reported that, adjusted for inflation, real wages of salaried workers in India have remained unchanged since 2019.
Second, the disruptive force of artificial intelligence (AI) is being felt in real-time. While promising efficiency, technology also threatens to displace millions of jobs, with some studies predicting that up to 800 million jobs could be impacted globally by 2030. The concept of job security or steady career growth is already being challenged. For example, layoffs that initially began primarily in the tech industry in 2022 have now become commonplace. This is already forcing professionals to accept the gig economy, thus challenging the idea of a regular monthly income. Gig economies often present fluctuating incomes that swing between windfalls and absolutely zero income in some months. These shifts are currently underway across various industries. Old beliefs, such as "your income will always go up" or "a good degree guarantees a stable career," are becoming outdated. We are entering a world where volatility is the norm, making the cost of lifestyle creep steeper and more detrimental than ever.
[This article has been reproduced with permission from Indian Institute of Technology Bombay, Mumbai]