Beware of ‘Lifestyle Creep’: Lurking dangers of costs that rise with lifestyle splurges in the UAE

After coping with higher expenses and a reduction in salary at the time of COVID-19, keep in mind certain costs can still creep in even after salaries resume
Image Credit: Gulf News archives

Dubai: As your income increases, so does your standard of living, which allows higher expenses to creep in as costs that were once considered luxuries or splurges, gradually turn into essentials.

Although such increasing expenses are considered a norm, the phenomenon is referred to as ‘Lifestyle Creep’ – and even if one can’t avoid such costs, one can prepare for them to stay clear of any debt-related pitfalls.

What is Lifestyle Creep?

The concept of Lifestyle Creep, also known as lifestyle inflation, is the gradual increase of your spending as your wage increases. The danger of Lifestyle Creep is that it happens gradually over an extended period of time, making it hard for anyone to notice.

Lifestyle Creep is characterised by a gradual shift in thinking and behaviour that sees spending on non-essential items as a right rather than a choice. One way to fight this subtle increase in costs is by budgeting and discerning wants from needs when making purchases.

Rising costs: From ‘living a little’ to ‘living large’

Although getting a raise and increasing your income should be looked at as an opportunity to improve your savings rate and retirement accounts, it’s instead perceived as a call to spend more and spend more often.

The common advice is to live modestly throughout your working years and enjoy your retirement years with all the pleasures life can offer. However, putting it to action is a bit harder than it sounds. The only way to understand and change how you spend your money is to track how and when you spend it.

It has the potential to derail retirement plans and debt reduction as frugality is replaced by a thrifty lifestyle. Lifestyle Creep can start small – like buying an electronic item you do not really need – but can quickly extend to more extravagant habits.

Experts add that an easily accessible credit and the use of credit cards, which enable bigger purchases, may contribute to Lifestyle Creep. Budgeting and willpower can be leveraged to avoid Lifestyle Creep.

How to recognise Lifestyle Creep

It’s a straight-forward process to see if Lifestyle Creep is impacting your life. The first sign is if you are living paycheque-to-paycheque every month. If you don’t have ample savings but you are making good money, then something is clearly amiss.

However, even if you have some savings and are not struggling as much, you could still be subject to the Creep. You may have some money saved up and may not be living paycheque-to-paycheque, but you may be spending entirely too much and saving far too little for the amount of money you are making – which is another commonly seen phenomenon.

To know for sure, calculate your monthly overhead (your fixed costs like rent, utilities, car payment, insurance plus your variable expenses like food, clothing) and compare it to your monthly income. If your income is a lot more than your estimated overhead, but you aren’t sure where that extra money is going, you are experiencing Lifestyle Creep.

Here’s an illustration to help do the math

Let’s say, for instance, you make Dh6,000 per month and your overhead is Dh4,000 – that should leave you with Dh2,000 left over each month. If you are unable to narrow down where that Dh2,000 is going, Lifestyle Creep is to blame.

This implies that if you are unable to determine where Dh24,000 each year is being spent and don’t have a savings account and/or are paying off credit card, education or home debt – it’s time to start budgeting or tracking your expenses.

Lifestyle Creep and varied age groups

Lifestyle Creep can be challenging for individuals approaching retirement, financial planners often caution.

A global study showed that those that are nearing retirement – at five to 10 years before retirement – are typically in their peak earning years and have already paid off their longstanding recurring expenses, such as a home loan or child-related costs.

Moreover, being flush with a surplus of additional income, it’s observed they opt for more expensive cars, pricier vacations, a second home, or a newfound affinity for luxury goods. Since the goal in retirement is to maintain the lifestyle one has become accustomed to in the years preceding retirement, these retirees require more funds to support their more lavish lifestyles – while eventually falling short.

When it comes to younger savers, the same above-mentioned study revealed that if they land their first well-paying job, ‘Lifestyle Creep’ creeps in. Spending habits can quickly change to include items that were previously considered luxuries. Such behaviour can make it harder to save for buying a first home, retirement, or quickly pay down educational debt.

What experts recommend?

Financial planners remind clients who fear falling into such a spending trap, to consider writing down their money goals and using them as a guide to spending decisions. A popular recommendation from experts is to plan for pay increases and limit the growth rate of your expenses.

If you go from making Dh9,000 to Dh10,000, experts add that you need to make sure you are ready with a plan when the larger salary is credited to your account as leaving that extra cash in your account may compel you to spend it.

A rule of thumb is to save 75 per cent of every increase in salary, until you are able to save at least 20 per cent of your pay annually. In the above-mentioned Dh10,000 instance, you’d want to save Dh750, since that’s 75 per cent of the raise amount of Dh1,000. You’ll continue to do this until you’re able to save at least Dh24,000 annually.

That jump to Dh10,000 is an over 10 per cent increase in salary. Inflation naturally causes the cost of living to increase, and you should be able to enjoy a higher standard of living over time.

Savings accounts with higher interest rates, like those offered by online only banks, or retirement accounts are both recommended places to direct those extra dirhams.

Another common tip from financial planners is to engage in a side hustle or take on a part-time job and save that income in its entirety.

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