What is life style creep?

Americans do things in style. So whether it is getting into a financial debt trap, chapter 11 bankruptcy claims, or living far beyond their means, they have a term for all of that. Like subprime. Like lending $700,000 to a person earning $ 17,000 per annum. They create products like “interest only”, “balloon repayments” or “increasing mortgage” – it does not matter!

One such term they have created is Lifestyle creep.

Life style creep is increasing your life style slowly without even realizing that it is killing your ability to save and invest. So shifting from public transport to private transport (OMG Subra you STILL travel by local train and bus, I wonder how you are able to do it?).

Shifting from a udipi (coffee Rs. 20) to Let’s do Starbucks (Rs.140), or multiplexes for movies, taking the corporate habit of J class flying to your own private life, …there are a million things. This is not just inflation, it is inflation + lifestyle creep.

Another variation of  lifestyle creep?

It is about people increasing their standard of living with temporary income – thus not being able to maintain it when the income suddenly disappears -Lifestyle creep is particularly a problem to those individuals approaching retirement. People, a few years before retirement are typically in their peak earning years, but at the same time many of their earlier expenses, such as paying off a mortgage, or raising a family have vanished. Suddenly with a new found surplus of cash, some people use it to buy more expensive cars, more expensive vacations or possibly a bigger home.

Since the goal in retirement is to maintain the lifestyle enjoyed in the last few years before retirement, these retirees require more funds to support their new, more lavish lifestyles. Unfortunately, they don’t have the resources to do this because they spent their surplus cash flow.

This is somewhat akin to the ant and the grasshopper story – the advice somebody can give them is “if you were singing during the summer, go and dance in the winter”.

So suddenly you have people who have “upped” their lifestyle with temporary income (come on, you knew it will end on the day you retire) and now they can now wonder how to continue this “temporary addictions”!

here is a nice article by CA Arvind Rao…

http://www.business-standard.com/article/pf/spare-a-thought-for-lifestyle-inflation-114112900712_1.html

 

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6 Responses to “What is life style creep?”

  1. between you and your finance there is “FIANCEE”(wife,girl-fiend)
    ladies won’t listen!!!
    you just start writing about stocks please!!
    all your posts are already things known but not followed
    IN “WEALTH AND HEALTH” MARGIN OF ERROR IS VERY VERY THIN” hence people slip!!
    dr nehru

  2. I suggest people to read a book namely – MILLIANAIRE NEXT DOOR – by Thomas J Stanley and William P Danko. It does not matter how much we earn but it really matters how much we save and invest. You were very right when u said that the people wish to extend their company sponsered life style to their Private life will end up emotionally dipressed because of peer presurre and expectations from family circle. It is always better to lead a economical life style – It does not mean we need to be deprived of certain level of comforts – People who are earning 5 figure salaries assume that it will remain at the same levels for ever. This attitude will be the main disease in the coming generation. Leveraging future income, Hedging against borrowed capital, Trying to compete with the life styles of others – I feel the above are going to be real perils. Why blame Insurance advisors, Brokers, Real estate agencies and so called Financial planners. Like anybody they are also trying to make or improve their life styles by their professions. ( I am not an INSURANCE ADVISOR, REAL ESTATE AGENT, STOCK BROKER, FINANCIAL PLANNER ). This is my personal opinion. May be this generation kids may not agree but still I believe in certain Principles as laid out in the above mentioned book.

  3. TITLE OF THE BOOKS BY THOMAS J STANLEY AND WILLIAM P DANKO

    1. MILLIANAIRE MAN NEXT DOOR

    2. MILLIANAIRE WOMAN NEXT DOOR

    VERY INTERESTING – THIS BOOK EXACTLY ADDRESSES THE ISSUES WITH CASE STUDIES WHICH ARE CLOSE TO LIFE SITUATIONS WITH QUITE A BIT OF RESEARCH.

  4. Americans obsession with taking anything global amazes me a lot. Two weeks back, I have attended a conference/convention at Vegas and it was attended by 15000 people (paid participants) all across the world. The various stalls at exhibition, multiple lecture halls, hotel rooms, side activities are all at gigantic scale.

    Even the investment or Business world, they only talk billions. Apple, Facebook, Twitter in the last year minted billions. Just a couple of months before, Alibaba. Now they are talking Uber/Ola valuations crossing Facebook.

    Everytime, I visit US, it amazes me. Can’t imagine how people living and studying in African countries can cope up with technological advances of US which they are yet to be aware of.

  5. very very interesting article

  6. The same happens when a corporate employee starts mirroring his lifestyle at office to lifestyle at home.

    You take clients to 5 star hotels & charge to corporate AMEX card, over a period of time you want to go such places on personal expenses

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