How to Keep the Lid on Lifestyle Creep

How to Keep the Lid on Lifestyle Creep

In recent years, central banks have grappled with curtailing inflation and easing interest rates reasonably.

At the same time, consumers have been feeling the impact of the rising cost of living. As investors, we may be unable to control whether rates go up or down or how rapidly consumer inflation rises and falls. Still, we can improve our long-term financial prospects by carefully managing our lifestyle creep.

Twanji Kalula is a communications manager from Allan Gray. Not having a specific financial background - he holds a Bachelor of Arts (Honours) degree in Media Theory and Practice from the University of Cape Town and a Master of Science degree in Corporate Communication and Public Affairs from Robert Gordon University, gives his personal views in easy-to-understand language on how we can all do better;

By Twanji Kalula - 5 February 2025;

Headlines around the world have been proclaiming that many are in the grip of a cost-of-living crisis. Global energy shortages have led to surging electricity prices, and geopolitical shifts have impacted supply chains, increasing the cost of many day-to-day items.

We do not need headlines or inflation numbers to confirm that life is costing us more – we feel the effects of inflation as we buy our groceries and pay our bills. 

However, the effects of inflation – the increase in the price of goods and services over time – reach much greater than living expenses. Inflation erodes the value of our money over time and should, therefore, be a critical consideration for the long-term investor, particularly when it comes to saving for retirement.

At a minimum, we should aim to generate returns that keep up with inflation to protect the buying power of our accumulated savings; over longer periods, we should target returns that outpace inflation to help us realise our goals.

Consider using a windfall to improve your financial position by saving and investing… 

Inflation, however, is just one of the factors that affect our overall financial outcomes. Lifestyle creep is another. Simply put, lifestyle creep is the increase in our expenditure as we earn more money. Unfortunately, it tends to work against us, but on the upside, in contrast to inflation, it is largely within our control. 

Lifestyle creep is insidious

Lifestyle creep tends to move slowly; it is often the product of numerous small adjustments to our spending over time, but it can also occur rapidly due to a significant life change (e.g. having a baby) or a large purchase (e.g. buying a home).

These adjustments can increase our monthly expenses substantially as they are generally not once-off and are absorbed into our base costs. 

While a degree of lifestyle creep is expected as we earn more, additional cash flow is often channelled entirely into funding new expenses, with little consideration for long-term investment goals. As products and services that may have been considered aspirational or out of reach become increasingly affordable, they may begin to feel like necessities, fuelling lifestyle creep.

This impacts the amount we have available for saving and investing and, therefore, erodes our ability to build wealth. 

Rampant lifestyle creep can derail retirement plans

One of the problems with lifestyle creep is that we often fail to account for it when we project how much money we will need to retire comfortably. We can unwittingly spend more on lifestyle-related expenses during the accumulation phase of our lives at the expense of saving enough to fund our retirement expenses.

Adding further complexity, lifestyle creep may also drive up the amount of money we will ultimately need to ensure a comfortable retirement, depending on what we envision for this phase of our lives.

... we should aim to build a nest egg that is large enough to replace 60-70% of our income in retirement. 

When deciding how much to save for retirement as a percentage of regular income, it is important to consider personal circumstances. We need to consider our age at the time we start saving (i.e. the amount of time we have to save) and the amount of money we will need to have accumulated by the time we retire. The longer we wait to start saving adequately, the more we will need to save. 

As a rule of thumb, we should aim to build a nest egg that is large enough to replace 60-70% of our income in retirement. This will ensure that we will be able to sustain a comfortable retirement, bearing in mind that the nature of our expenses is likely to change as we get older. However, too often, we only calculate this amount when we first start investing. If we fail to revisit this calculation over time and do not account for the effects of lifestyle creep, we will likely not have enough. 

Managing lifestyle creep improves long-term financial outcomes

An unwieldy lifestyle creep can result in our expenses outpacing our income. At first, we may find ourselves living from payday to payday, but left unabated, many of us fall into a debt spiral to sustain our ongoing lifestyle costs. The compounded cost of expensive debt further fuels lifestyle creep and is one of the reasons many investors never meet their long-term financial goals. 

Luckily, there are several things we can do to help keep the lid on lifestyle creep: 

Manage overheads

Good financial planning should balance present needs with future wants. By tracking expenditure, interrogating expenses on a monthly basis and comparing costs from month to month, we can monitor how significantly our expenses are escalating. Armed with this information, we can make better spending decisions. 

Resist the urge to splurge when times are good

We are inclined to spend more when money seems more freely available. For example, when interest rates are low and home loan repayments are therefore lower, we have a little more wiggle room to spend more exuberantly.

During these periods, our lifestyle creep rate can skyrocket. By handling our costs during good times, we can move through more challenging times, like when interest rates and home loan repayments are higher, with greater ease and avoid feeling like we are constantly moving between periods of feast and periods of famine. 

Use windfalls wisely

Additional sums of money have the power to help us accelerate the pace at which we achieve our financial goals. That said, windfalls can trigger lifestyle creep when they are used to make purchases that increase our base costs. For example, getting a new car when receiving a bonus may seem like a once-off expense, but a new car may significantly increase ongoing fuel, maintenance and insurance costs. 

A well-considered financial plan … can go a long way in keeping lifestyle creep at bay

Consider using a windfall to improve your financial position by saving and investing: Build an emergency fund, make an additional contribution to a retirement product, such as a retirement annuity, or contribute to a tax-free investment. 

Revisit retirement savings targets

As part of our ongoing financial planning, we should regularly recalculate how much we need to save for retirement. This exercise ensures that we remain on track to draw a retirement income that can support a comfortable lifestyle. 

Increase savings rates

Reframing how we see income increases can meaningfully impact our investment outcome. Income increases can be used to keep pace with inflation and increase investment contributions. 

Invest in a fund that beats inflation

Retirement investments need to target and keep pace with inflation. Investors should select a fund with a proven track record, take on sufficient risk to generate above-inflation returns, and appropriately manage this risk across a range of asset classes and regions.

Keep track to keep on track

A well-considered financial plan, which is revisited regularly to account for changes in personal circumstances, provides an invaluable road map as we work towards achieving our long-term investment goals.

It also provides a disciplined spending system that can aid in purchasing decisions, and can go a long way in keeping lifestyle creep at bay.

Dave Ramsey on What to Do in Trying Markets

On the Trump Trade Tariffs, offshore markets took quite the tumble before Wednesday night’s partial and temporary reprieve, especially last Thursday and Friday when US markets lost -12,5% in two days.

To give some further perspective, markets in the US were very excited with much jubilation in October last year, when the US S&P share markets reached new all-time highs.  These markets, simply stated, by the end of last week, were at the very same levels now as they were then;  

To the close of the trading day on Monday, at the bottom of the current correction, the US S&P market was still up 80% over the last 5 years (by the end of yesterday, this was over 95%).

Similarly, the JSE was down 8% last week, but by Monday, it was up 9% over one year and 76% over the last 5 years.

(By last night, this is now over 14% over one year and just over 79% over 5 years);

I do feel this gives a better overall perspective.

With this as a background, US financial influencer Dave Ramsey, I thought then gave an excellent insight in this short video/reel (do click on the link), at the bottom of the market earlier in the week, on what investors should be doing, and how to view;

Dave Ramsey Reel

For the full video from where the above reel was taken, you can click on this further link below;

Dave Ramsey Video

These are both very good. Do have a look at them.

ANOTHER REASON WHY YOU SHOULD HAVE MORE HEDGE FUND EXPOSURE IN YOUR PORTFOLIO

I met with one of our hedge fund manager’s Peregrine Capital in the week and they, like all other fund managers, have been keeping their eyes on the markets 24/7 since last week’s Trump tariff announcements.

One of the slides they shared with us below, I think, captured why you should have hedge fund exposure very well. Their market-neutral fund is up 1% since the start of the month, and their high growth fund is down 1% at the point where the market was down 15-20%. Even after the semi-recovery, they are still in a better position than the market because the fund didn’t lose so much.

FRIDAY FOOD FOR THOUGHT