You may have heard of lifestyle creep or ungazincishi inice time but you may not be sure what that means. The irony is that there are actually two meanings. The first, and perhaps the more commonly known and sometimes referred to as lifestyle inflation, is that as inflation causes your lifestyle expenses to rise it eats into more and more of your income, and in that sense the cost of your lifestyle creeps more and more resulting in less and less disposable income to invest. The second meaning and perhaps a more contemporary meaning is that when you’re young your lifestyle is a major part of your life but that as you grow older responsibilities and their associated costs accumulate which eat into your lifestyle, in other words limiting yourself to a nice time (ungazincishi inice time).
The key difference between these two meanings is on the one hand the cost of your lifestyle eating into your income whereas the other is the cost of living eating into your lifestyle!
Regardless of which interpretation most affects you, both can have negative impacts on your financial freedom and wealth creation. So this article aims to give some advice about how you might avoid the negative impacts of lifestyle creep.
First, let’s look at how to reduce the increasing costs of living. The first thing to acknowledge is that your lifestyle costs are not fixed. Simply recall how far you could stretch R100 when you when you were a student. The reality is that as soon as you start earning money or your salary increases you believe you can afford more luxury in your lifestyle - you start upping your lifestyle to match your salary. Most people see those extra digits in the income as ‘fun money’ that doesn’t need to be invested. The sad reality is that upping your lifestyle often means that you’re living from paycheck to paycheck, or worse when your lifestyle exceeds your income forcing you to take out debt to cover your new ‘luxury’ lifestyle.
There are many reasons why people tend to increase their lifestyle costs with their income. Perhaps the most common is the tendency to ‘keep up with the Joneses’. We tend to compare ourselves to our peers. So instead of comparing yourself to your past, more frugal self, you’re now comparing yourself to colleagues, some of whom may be earning more than you. A recent study found that the neighbours of lottery winners are more likely to incur debt. Social media only adds fuel to this phenomenon allowing for a constant awareness of who has more.
So how do you stop lifestyle creep? The easiest way is to implement two simple principles in your life. Firstly, discerning between what you need and what you want. This in itself is a hard task, because you may tell yourself that you need that Michael Kors handbag. However, if you’re honest with yourself, you know that this is not true. Again, thinking back to more frugal times will remind you of what you actually need. In truth, you only need food, shelter and clothing. Everything else is non-essential. The next key principle is value for money. I mean you can either buy a R20 hotdog at PnP for lunch or a steak for R300 at Signature in Sandton. Now ask yourself - do you think the steak is going to be 15 times more tastier or nutritious - unlikely.
I’m not suggesting that you become a hermit who lives in a cave, eats berries and wears a hessian sack. That’s one end of the extreme. What I’m suggesting is instead of focusing on what the Joneses are doing, think about what you would do if you were as wealthy as Warren Buffett. Interestingly, Buffett is notoriously frugal and still prefers to drink Coca-cola and eat hamburgers at his local diner in Omaha than fine dining. In order to get there, you have to invest, and in order to invest you have to rein in your lifestyle to make sure you have disposable income to invest. Therein lies one of life’s deepest truths, to be wealthy - don’t spend your money, invest it.
Now let’s look at the second "how to limit the cost of living eating into your lifestyle". In many ways this is unavoidable. For example, when you’re a student your cost of housing is low, you might be living with your parents or staying in college accommodation. However, you can’t stay there forever so you will have to at some stage get a place of your own, which means spending money on rent or paying off a mortgage. The same goes for your cellphone bill or health insurance, which may have been paid for by your parents at one stage until they become your expense to carry.
So how do you stop the cost of living from eating into your lifestyle. The two principles to follow here are to discern again between what do you need and what do you want? I often hear of young professionals who have signed up to a basket of financial services products which are debited from their account the moment their paycheck arrives. Some of these policies may be necessary, but some may not be. Incentivised brokers target first time earners convincing them that this is something they “need”, when in fact it may not be the case. To better understand your personal risk and how to adequately protect yourself, I’d recommend reading this article.
The second principle to embrace to stop the cost of living eating into your lifestyle is to acknowledge that your lifestyle will change. I cannot party on a Sunday night like I did when I was a student and expect to function on Monday at work - that is just a fact of life. So like any change in life, it’s better to embrace it gradually instead of a dramatic forced change. Instead of partying till dawn every night of the week, mix it up - have your friends over for dinner and enjoy their company. Recognise that what you enjoy in life, can very often take multiple forms, some of which may be a lot easier to maintain and cheaper than others.
Regardless of whether you want to limit lifestyle cost inflation eating into your income or your cost of income eating into your lifestyle, here are ten tips to manage your expenses:
- Track your spending
- Create a budget
- Pay yourself first by automating your investment contributions
- Avoid debt
- Choose your friends wisely!
- Create a fun fund
- Celebrate meaningfully (not just spending for the sake of it)
- Avoid social media comparison
- Make gradual lifestyle changes
- Invest at least 50% of your salary increases