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Friday, 30 October 2015

Save for retirement by combatting lifestyle creep

There's a well-known proverb called Parkinson's Law which goes like this: "Work expands to fill the time available for its completion."

You can imagine how, in terms of productivity, this could be helped by shortening deadlines. Give yourself a week to write an email and it will most likely take a week or give yourself five minutes and it most likely will get done then and there.

Productivity aside, this law can also apply to our salaries, our homes, our diets and more. There's another similar phenomenon called lifestyle creep whereby as your salary rises your tendency is to spend the extra rather than save it.

For instance, if you get a promotion and you are now earning £10,000 more, rather than continue to live as you are and save the extra money or pay off debt, you're more likely to upgrade your phone, buy a new car or build an extension. Your lifestyle will creep up with your salary and what was once a luxury will soon become the new normal.

The problem with this is, as humans, we love progress and if were not progressing, we're stagnating. And hey, you earned it! Right? Right?!

After paying off debts, the best thing to do with surplus income is to save it. By saving a much higher proportion of your income you prioritise working less and retiring earlier over living a fancier life.

There are some people who save as much as 50% of their annual income. See here: the powerful saving principle that will let you retire decades earlier Such a high proportion means that for every year worked you have saved a year of retirement. It also means that you have adapted to living on less and are able to maintain that simpler lifestyle.

Imagine you earned £40,000 a year and saved £10,000 a year for retirement. That's still a hefty sum but you will be used to living off £30,000 and would still have to work longer to retire with enough money to maintain that lifestyle.

Sure you can't take your money to the grave and I understand living for the moment, but ideally we are likely to live a lot longer than we think and spending all the money we currently have isn't likely to make us happier.

The idea here is not to make you feel guilty for indulging in luxuries but to make you recognise what you already have. Think about your life right now, what parts are you content with? Is your house big enough? Does your car get you from A to B? Do you still feel you look good in your clothes?

Imagine you suddenly have double your income, would you really change your lifestyle all that much?

It's time to recognise happiness, not to chase it.

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