Lifestyle creep
TLDR: High income is not always equal to high savings / investments
What is this creep? No, I am not talking about the pervert next door who watches you every time you collect your amazon delivery orders, rather a different kind of creep who lurks behind the scene, always ready to pounce and lead you into temptations.
Lifestyle creep is a common phenomenon that affects even the most mission oriented and disciplined amongst us. Yours truly is no stranger to this. I started my career in Singapore as a lowly paid grunt in the corporate ladder with a salary well below the median salary in Singapore.
At a ripe old age of 23, I started my Singapore career. Single, living with housemates, cooking my own food (Heating up frozen pizzas is cooking, right? right?) life was simple.
Fast forward a decade and half, I am making more than 4 times the salary that i started with, so i should be saving a lot right? If you have seen my other post about savings and liabilities,you know that my savings rate is 28%. Shouldn’t I be saving more?
This is where lifestyle creep comes in.
Some of this spend is unavoidable - getting married, starting a family, kids going to school, classes, mortgage, grocery spend etc. There is going to be an obvious difference in spending between someone who is single, living in shared accommodation vs. paying for your own place and supporting a family.
It transforms into a bad thing only when you can no longer distinguish between needs and wants and the line gets blurred. Let us talk numbers now.
Take the case of our go to person ‘X’ who starts his/her career fresh out of college with a starting salary of 20,000 Rupees / Month
Not too shabby right.
Scenario 1:
Let us assume he or she is investing Ω≈za fixed percentage of their salary,
Say 20% every year and the return on investment is 10% per annum. What does the portfolio look like?
That is a very decent portfolio without breaking a sweat.
Scenario 2:
If the person not only saves 20% each year, but also saves 50% of his/her increment every year
Look at the difference in the return.
If you can avoid lifestyle creep and a small increase of 3.5% per year (half your annual salary increment) nets a huge increase in the savings.
What can you do to avoid lifestyle creep ?
Learn to distinguish between needs and wants
Automate your investments
Treat your annual increments as a new income stream
Don’t let expenses increase at the same pace as your salary
Save just 50% of the salary hikes/increments
Spend the rest to address your needs and occasional wants
Do you think you have the discipline to do this year after year. Leave your comments below.