Lifestyle Creep and priorities - house keys and dollar cash floating around gift bags and credit card

Lifestyle creep was a new phrase to me not long ago, but I understood the meaning right away: giving oneself a lifestyle upgrade with pay increases or milestones achieved.

What does lifestyle creep look like?

When life improves, particularly if more money is coming in, a somewhat natural inclination may be to spend a little more of it on oneself and splurges – things not previously affordable. Here are a few examples:

  • just got a new job
    • buy a new wardrobe, maybe even designer items “because I deserve it”
  • graduated from school, university, or graduate program
    • take an expensive vacation, maybe lasting all summer, to celebrate
  • just got engaged, married, or grew the family
    • buy or lease a new (or new to you) expensive vehicle
    • move to a much larger rental home

More meals out, more Uber Eats, a new car or new rental digs can all feel like well deserved rewards with the better income, combined households, or achievements made. But do they address your long term goals, or put those goals more out of reach?

What we want now versus what we want most

Lifestyle creep can be a threat to hitting long term, important goals which take cash. Whether the big plan is to pay off student loans, save for a down payment on a first or move-up home, or save for a loved one’s higher education, cash is king. If that cash is spent on little indulgences on a regular basis, it can erode the ability to do what is wanted the most.

I had the pleasure of doing my junior year of college abroad, in Florence, Italy. Sometimes, a few of my friends and I would go out for coffee after classes finished for the day. Once I reached out to a classmate whom I didn’t know well (she was and is quite nice) and invited her to join us. She declined, explaining that she was on a tight budget, and if she enjoyed going to a cafe now, and often, she would not be able to travel later as she’d run out of money. It was a simple case of budgeting over a fixed amount of time.

Initially her response surprised me, since one coffee did not seem like a large expense, but of course she was right. It would be easy to ruin her travel budget by chipping away at her fixed amount of money for the year. While I did not entirely give up afternoon coffees, her comments did impact me, and that indulgence became an infrequent one for me. It was a clear case of choosing what I want most over what I want now.

Lifestyle creep and real estate purchasing

It’s difficult to save up a down payment, particularly 20% or more, for buying a home. It takes tremendous will power and sacrifice for most people to accomplish it.

Most of the people whom I’ve met or worked with have embraced long term frugality to at least some degree to pull it off (and frequently to simultaneously clear student loans and any other financial obligations).  These folks aren’t racking up lots of frequent flier miles, they don’t drive new, expensive vehicles, they aren’t wearing designer clothes, and they don’t spend a lot of time and money in restaurants, theater, or costly entertainment.

These folks who do scrimp and save are putting more value on tomorrow and their long term goals over what they’d like to enjoy now.

Sometimes we get little windows of opportunity when the market softens for a month or two or three. Those who have cash for the down payment, a strong pre-approved loan, and clean credit can strike while the iron’s hot. Want a good deal? Be prepared to jump on the opportunity when it arises.

What I can rent is nicer than what I can buy!

Perhaps one of the biggest shocks to first time home buyers is that what they can afford to rent is almost always much nicer than what they can afford to purchase here in Silicon Valley.  Rents are high, but homeownership is higher, and the ratio between them is skewed.

Moving from a nicer rental to a less nice but owned home is sort of the opposite of lifestyle creep – but it’s also the beginning of building something better in your life.

Then why buy?

  • If you purchase with a fixed rate mortgage, you’ll have a hedge against inflation. Alternatively, your rent can go up every year and there’s not much that you can do about it.
  • If you buy a home, eventually you will have equity in it. If you sell it after a few years, nearly always you’ll make money (typically it needs to be held for 3-5 years to break even, though that can vary). After 10-20 years, you have a lot of equity and can use it to buy a place for cash in a less expensive area.
  • If you hold it for  30 years, you will pay off that mortgage (unless you refi and pull money out) and you will have much lower costs for housing in your retirement years.
  • Additionally, when you own your own home, you have more freedom to improve it, add on (if it’s a house and you have enough land), and to do things that you might not have permission to do as a renter.
  • Oh – and there are tax benefits to that mortgage while you are paying it off, too.

My grandfather used to say “Save your dough!” and I will admit that it took me a while to see the wisdom in it. Over the years I’ve learned a lot from my clients. Some of those who drive less fancy cars, and have less fancy clothes, and generally don’t indulge themselves too much often are or soon become that proverbial millionaire next door. They don’t fall into the lifestyle creep trap. None of us should.

Author

  • Mary Pope-Handy

    Silicon Valley Realtor, selling homes in Los Gatos, Saratoga, San Jose, Silicon Valley, and nearby since 1993. Prolific blogger with a network of sites.

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