Lifestyle creep and how it can impair your retirement

As yesterday's luxuries become today's necessities, not watching out can have dire consequences for your retirement. What has been perceived till now to be a western sin, is slowly but definitely seeping into urban Indian lives.

Definitions which abound in many online forums are largely centred around sudden increases in disposable income or windfall gains leading to a splurge on “lifestyle” items, which eventually become necessities. For instance Invest opedia defines lifestyle creep as:

A situation where people’s lifestyle or standard of living improves as their discretionary income rises either through an increase in income or decrease in costs. As lifestyle creep occurs, and more money is spent on lifestyle, former luxuries are now considered necessities.

An important point to highlight here is, it is indeed about “creep”, not necessarily the large, visible items… like the exotic vacation, investment in the timeshare or the larger car (which does no more than take you from one place to the other), the latest smartphone you must get (even though the one you bought last year is working quite well), but the small indulgences. For instance inflated grocery bills with gourmet additions/ substitutions, liquid soap instead of bars, the photography magazine subscription (which you do not have time to read) , the Starbucks latte you pick up before work every morning, the wi-fi router you never switch off (because the electricity bill doesn’t pinch you anymore).

Having experienced this first hand, both in terms of the creep and the hardship when I needed to pull back, what I have learnt is:

Not watching out and letting things slide is easy. “NOT monitoring your finances, is indeed effortless!”

Pulling back on your lifestyle when you are staring at an eventuality like a job loss or anything equally shattering, is akin to withdrawal symptoms.

The silver lining is the realisation (as it dawns): How LITTLE you REALLY NEED to get by, and how much all those superfluous little indulgences eat into your “rainy day fund”!

Lifestyle creep, like similar sins is usually born and nurtured when money is plentiful and keeps rolling in. For instance, it could start with paying off your huge mortgage (which forced you to scrimp all these years) with the bonus from your stellar performance in the last quarter. Now suddenly with no mortgage to pay there is loads of surplus cash which you can spend.

This prompts you to take that long awaited exotic vacation to Seychelles! Of course, you deserve the reward and should celebrate your loan closure and your performance. You aren’t yet a victim of creep but you could get there. It all depends on what you do next.

 

So the very next year, when you decide to hit an exotic and expensive beach resort again, (only with no generous bonus to fund it this time), but its something you think you have earned because of the perpetual increase in cash flow you have created (by paying off your mortgage). You follow this up by planning another one and soon (Goa/ Kerala don’t make the cut anymore), the indulgence has become a habit and is an integral part of your annual budget. ‘Lifestyle’ has indeed ‘crept’ up on you.

It is however, Retirement Plan Company important to reiterate the distinction:

An occasional indulgence isn’t lifestyle creep, as long as it stays occasional. It is lifestyle creep only when it becomes a habit.

Source: https://www.tomorrowmakers.com/articles/life-insurance/lifestyle-creep-and-how-it-can-impair-your-retirement