A behavioral hack to nip lifestyle creep in the bud

A behavioral hack to nip lifestyle creep in the bud

This is the second part of our Lifestyle Creep Series: What is lifestyle creep (Part 1) and A spreadsheet to detect it (Part 3)

Raises are good things, right? But with a raise, comes the tendency to increase spending. And you should, as you worked hard to earn that raise. Enter lifestyle creep: Boosting spending is sticky (and sneaky) making it hard to reset your spending back to a lower level. And it can be even more dangerous if your industry undergoes structural change, like financial services in 2008 or tech during the dot-com bubble.

RadReader Rafet Eriskin fights lifestyle creep using a tactic inspired by the inverse of Richard Thaler’s nudge theory – Sludge. Sludge acts as a speedbump, an intentional process to combat a specific type of behavior. Here’s how Eriskin fights the urge to buy a new $500 iPad.

  1. Delay the gratification by sleeping on the decision for say a couple of days to a week.
  2. Having delayed the decision I can still opt to buy as it may be something I need / want. Or…
  3. Chances are that I decided not to purchase which leads me to take the following steps…
  4. In a separate sub account, which I call “Nudge” on my online bank, I transfer cash, eg $500, equivalent to the amount of the cost of the IPad.
  5. Every quarter (on average) I “flush” this “Nudged Cash” into my investment account and deploy across various investments.
  6. Repeat

He adds how he turns negative expected value into positive value:

This whole thing moves the instant gratification that buying something gives to somewhere between step 4-5 and is almost always more gratifying. It is kind of a “swap” of negative expected value (Panerai watches, household iPad number #, etc) decisions to positive expected value decisions (stocks, etc).

So throw some sludge on that next purchase!

Editor’s note: I use Simple (affiliate link) because of its low minimum and online ease accounts for these types of sub-accounts.

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Ready for a personal finance tune-up? Download our Guide to Lifestyle Creep.