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Recognizing (and Avoiding) Lifestyle Creep

Summary

The Mercer Advisors guide to the hazards of lifestyle creep—and 3 strategies to help avoid its pitfalls.

Young man looking at credit card.

The age-old adage that “money doesn’t buy happiness” may have recently been debunked. A recent study1 in Proceedings of the National Academy of Sciences found that happiness did increase along with rising income. What’s more, researchers found that “happiness really only plateaus as income increases—above roughly $100,000 a year—for people who were already somewhat unhappy to begin with.”2 Despite higher income correlating to improved well-being, one concept may continue to erode overall financial wellness at all income levels: lifestyle creep.

What is lifestyle creep, you ask? This concept, otherwise known as lifestyle inflation, maintains that increased income tends to correlate with increased spending. While this is an easily understood idea, that doesn’t stop most of us from succumbing to its wiles. It’s only natural to want to celebrate after receiving a pay raise or a bonus: We deserve to reap the benefits from working hard! Yet unless one is careful, that kind of thinking can create a new, unhealthy baseline for spending. What you once considered an extravagant splurge may eventually become your new normal. This is especially true in the age of social media, as comparing one’s own lifestyle with those of extravagant Instagram influencers can inspire an inferiority complex. Such unhealthy social comparisons and unfulfilling material pursuits may contribute to lifestyle creep.

As income—and expenses—increase throughout your career, it also becomes increasingly important to plan for the unexpected. The old saying “make hay while the sun shines” is particularly relevant in a time when 62% of American workers say they are living paycheck to paycheck.3 Lifestyle creep can be a major factor if, as income rises, one chooses to increase spending rather than savings.

Here are a few of the risks associated with lifestyle creep, and how to help protect yourself:

Hazard = Unemployment. Unemployment can deal a crippling blow to your family’s financial plan, particularly in a one-income household. How long could you comfortably cover ongoing expenses if you were to unexpectedly lose your job? At what point would you start to cut back on discretionary expenses?

Protection = Emergency funding. At Mercer Advisors, we recommend keeping enough liquid funds to cover three to six months’ worth of expenses, to help protect against sudden loss of income. While holding cash may seem boring to most people, making sure you have enough of a cushion in a savings or money market account can go a long way toward helping cover an unexpected loss of income.

Hazard = Disability. Losing current income or earning potential due to a disability can be devastating to your financial security. While it may take a few months to find a new job, a disability may last longer or even be permanent.

Protection = Adequate insurance. As income and expenses increase, so too does the need for proper insurance to protect yourself and your loved ones. In the case of an illness or injury where you’re unable to return to work, a disability insurance policy can replace a fraction of your income for the duration of your disability.

Hazard = Insufficient retirement savings. In general, Americans are not very good at saving for retirement. Many think they can’t afford to start saving at the inception of their career and assume they will save more, or start saving, as they earn more. The trouble with that plan is that our cost of living often increases along with our income, and those higher costs don’t magically disappear when we retire.

Protection = Pay yourself first. As with most habits, the hardest part of saving for retirement is getting started. If you can commit to saving a certain percentage of your income, early in your career, it can become much easier to meet savings goals as your income grows. Prioritizing your rate of saving before increasing your spending can help hedge against lifestyle inflation.

Lifestyle creep is a common problem we encounter at Mercer Advisors, because it can affect anyone, from young professionals to those nearing retirement. These risks and preventative measures are just a few of many considerations associated with lifestyle creep. We can help you plan for the short- and long-term impacts of an inflating lifestyle and ensure you are prepared for any potential problems.

1 Income and emotional well-being: A conflict resolved,” Proceedings of the National Academy of Sciences, November 2022.
2 “More money means more happiness for most of us—here’s when earning over $100,000 doesn’t help,” CNBC, March 2023.
3 “62% of Americans are still living paycheck to paycheck, making it ‘the main financial lifestyle,’ report finds,” CNBC, October 2023.

Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.