What is lifestyle creep and what are strategies to avoid it?

This is the first part of our Lifestyle Creep Series: Using ‘nudge theory’ to slow down lifestyle creep (Part 1) and A spreadsheet to detect it (Part 3)

Ever wondered how Billions’ Bobby Axelrod makes casual chic look so effortless? Well it turns out that for starters, his hoodie is no ordinary hoodie. It’s a Loro Piana cashmere zip-up, priced at a cozy $2,295. Adds Axelrod, “What’s the point of having fuck you money if you never say fuck you.” I guess nothing says FU like a $2,000 hoodie.

As we embark on our move, we’ve been going straight Marie Kondo on our closets. And while there were no cashmere hoodies, I did find some serious relics of my former Wall Street spending habits. A $2,200 road bike. A $1,000 wet suit. $800 GPS watch. $500 rollerblades (gasp!). Taking stock of the combined usage of these four items resulted in a self-directed F*** you – they had been used, in aggregate, eight times. The wetsuit had never caught a wave for crissakes.

Trial by FIRE

The loss of a recurring paycheck (and resulting cash flow volatility) has led me to poke around the margins of the FIRE – Financial Independence, Retire Early – community. Many of the investing principles (compounding, minimize taxes and expenses, use tax-advantaged accounts) are Investing 101. But one of their principles really struck me:

Simplifying and redesigning your lifestyle to reduce spending. Your wants and needs aren’t written in stone, and less spending is powerful at any income level.

Lifestyle creep is sneaky AF

Axelrod’s $2,000 hoodie and my road bike share one similarity: lifestyle creep. It’s intuitive, if you earn more, you can spend more. But this creep is a creep. It’s sneaky. It unintentionally resets your baseline. And it’s hard to undo. Adds blogger Peter Lazaroff:

It starts with little things: adding premium cable channels, buying the more expensive bottle of wine, making more frequent phone upgrades, giving nicer gifts for birthdays, adding impulse items to your cart on Amazon, buying tickets for better seats at an event, staying in nicer hotels, paying for slightly nicer airline seating…

The ? to wealth is not what you think

Then it’s iPhone upgrades and X5s. In our heart of hearts, we all know that the road to financial independence travels through increased saving. Lost in the conversation is the intentionality behind spending. Adds longtime hedge fund investor Ted Seides: “The key to wealth is not how much money you make, but how much money you spend.” These three graphs show a very common picture leading up to (and after) the credit crisis:

Financial independence = freedom

The green represents freedom; red, constraints. The Creep alert graph shows spending that outpaces income growth, often fueled by the (reasonable) belief that you’ll earn more the following year. Then there’s Creep gone cray, when an industry change (i.e. venture money running out, bull markets ending) not only dismantles the previous assumption, but resets income at a much lower rate. For a long time.In the words of Fight Club, “The things you own end up owning you.”

FIRE at what cost though?

The FIRE disciples go to great lengths to get their savings above 50% (here’s proof that it works) living in micro-studios with Murphy beds, limiting themselves to $20 of discretionary expenses (or living in truck in the Google parking lot). To me this captures one of life’s most challenging dualities: delayed gratification vs. living in the moment. I do believe that spending can contribute to your long term happiness. It just requires intentionality and deep self-awareness.

Indulge with intention

Around the credit crisis, the purchase du jour for a newly minted Vice President on Wall Street was the Panerai watch. With its big face and large digits, it was the wide pinstripes of watches and cost multiple months of rent. I had a few friends, who adored watches and they could tell you which parts were handmade, their WWII history, and the rituals they used to maintain their watches. Every time the watch touched their wrists, their hearts fluttered with joy. The watch had no impact on me, yet I wanted one to showcase my status within my then-tribe. I ended up not getting one (it turns out that Air Maxes are my Panerai) and my entrepreneurial self is grateful for the rent payments.

Do you even budget, bro?

The FIRE community tracks each purchase to the penny using elaborate spreadsheets. That’s probably overkill, especially since most Gen X professionals I speak to don’t even know how much they spend each month. (Just a few years ago, I began tracking spending vs income in four column spreadsheet.) Vicki Robin, (the accidental leader of the FIRE movement) has a simple heuristic to get your spending off autopilot by converting large purchases into “hours of life energy.” She adds “So if you make $300 a day and want to buy a $100 pair of shoes, you ask yourself: Are those shoes really worth nearly a third of a day of your precious time on earth?”

How to avoid ‘Lifestyle Creep’