Today vs. Tomorrow How Lifestyle Creep Could be Jeopardizing Your Financial Future

As I think about the 155th meeting of Lafayette and Lehigh’s football teams on November 23rd, I find it difficult not to reminisce about the good ole’ days at Lafayette. During my college years, the hit HBO series The Sopranos was in its prime, guiding much of my Sunday night social calendar. Each week, my […]

As I think about the 155th meeting of Lafayette and Lehigh’s football teams on November 23rd, I find it difficult not to reminisce about the good ole’ days at Lafayette.

During my college years, the hit HBO series The Sopranos was in its prime, guiding much of my Sunday night social calendar. Each week, my friends and I would pool together funds for a pre-Soprano’s meal consisting of pasta, butter, and some frozen garlic bread. Looking back, that meal was far from luxurious and not something I’ve since served dinner guests. After all, being in a better financial position should mean better meals, right?

The habit of upgrading spending habits alongside increasing income has a name: lifestyle creep. While it’s natural to enhance your lifestyle as earnings grow, folks would be well-served to focus on the pace of both. Young professionals right up to retirees often fall victim to inflating their lifestyle at a faster rate than their earnings. When this happens, the sacrificial lamb is almost always long-term savings.

It’s easy to see why this happens. Present bias is a technical term for a sentiment many of us understand and experience — it’s far more enjoyable to use the money now than it is to save it for the future. This is especially the case when the notional future is retirement, which could still be decades away. This bias compounds lifestyle creep, and it seems to transcend age, influencing those in their early professional years right up until the golden years.

Young professionals seem to be the poster child for lifestyle creep. Many professionals in their 20s and early 30s are shackled with student loans and maintain little in the way of emergency reserves. Yet at the same time, many sport luxury apparel, buy new technologies and maintain a buzzing social life.

The next phase for many is the life building stage: marriage, mortgage, and maybe children. Between kids’ activities, making your house a home, and the occasional date night, lifestyle creep is never-ending for this category. While some life builders may have started saving into their retirement plan years ago, many failed to escalate those savings rates, spending more on happiness today.

As people move beyond this stage of life and become more well-established, bigger ticket items tend to sneak into the picture. Many find themselves sandwiched between aging parents and adulthood-seeking children.  Both may require significant financial support.

While lifestyle creep can come in many different forms and cross many different life stages, the point is that it distracts and derails people from reaching longer-term financial goals. Over the last ten years, an extended bull market has masked many savings shortfalls. However, forward-looking capital market assumptions suggest a reversion to historical averages. Equity returns over the next ten years may not be as high as they have been in the past, and the impact of poor savings habits may become more pronounced, especially for those who assume market returns can make up for an underfunded retirement.

While returns may be outside the control of market participants, there are factors well within their control. Chief among them, and perhaps the largest driver of future wealth, is one’s savings rate. Using technology to automate savings, regularly monitoring your financial goals, and evaluating the lifestyle creep you may be experiencing is a combination that will pay long term dividends. Finding the balance of happiness now versus happiness later is an imperfect pursuit, but one worth considering no matter where you are in life.

Securities offered through M Holdings Securities, Inc., a Registered Broker/Dealer, Member FINRA/SIPC. Investment Advisory Services offered through Cornerstone Advisors Asset Management, LLC, which is independently owned and operated. #2715889.1

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