Oran Hall | Guard against lifestyle creep in 2025

The angels have stopped their singing, but there are heralds from 2024 that 2025 will not be all rosy; it will be good for some but not for others.

While there will be challenges for those reaping the bad, there is no guarantee that those benefiting from the developments in 2025 will ultimately be better off, for danger lies ahead for those who fall prey to lifestyle creep.

Lifestyle creep, also called lifestyle inflation, refers to spending increasing as income increases primarily to raise the standard of living. As more financial resources are directed to spending, what used to be seen as luxuries before are perceived as necessities.

Among the group that can expect to reap higher incomes are young professionals who earn promotion or earn more from consulting and various forms of business and are driven by image and social prestige, people in pre-retirement earning more than they ever earned before but spending less because they have paid off their loans and no longer have responsibility for their children who have become independent, and recently retired people who have received their 25 per cent tax-free lump sum payment from their retirement fund and are receiving their pension and drawing down on their retirement savings and investments. Not to be forgotten are people who move into higher-paying jobs by changing employers.

There are others who are likely to have more money to spend in 2025. Perhaps there are some who collected good bonuses in the past year, which they have protected well. There are also individuals who may have made good money from their investments, liquidated an asset, or benefited from a legacy from a relative, or received a good pay-out from an insurance claim. Not to be forgotten are those likely to get a big pay day before the year ends – perhaps through the completion of a new collective labour agreement carrying with it retroactive pay, or employees likely to receive a 2025 year-end bonus.

Higher income and lower expenses lead to higher discretionary income, meaning higher spending power. The real risk exists that money that should be saved and invested may be diverted to fund the acquisition of high-end motor vehicles and additional vehicles, for example, support more expensive eating choices, vacations, and living accommodation. This becomes more pressing for individuals who are drawn to compete with other people who seem to be doing well, or people who want to make up for what they figure they missed in the past.

This tendency to spend more as income increases is often not obvious. No wonder it is called silent inflation. This desire to improve the standard of living can have the opposite effect: decline of the standard of living. Spending without careful thought can lead to increased debt and lower savings. The latter reduces the capacity to invest and removes a critical cushion which can be useful in times of crisis and emergency.

The year 2024 has bequeathed several good and bad things to 2025. The good includes inflation within the target range set by the Bank of Jamaica, BOJ, although many still squeal about rising prices and pressure on their pockets, low unemployment, government spending on roads, a relatively stable exchange rate, and moves by the BOJ to lower interest rates. This is a mixed bag. When lenders finally adjust lending rates, borrowing should be cheaper, but, on the other side, savers and investors in interest-bearing securities are already seeing lower returns. The big negative is that the economy is not robust – sometimes delivering anaemic growth, other times, negative growth – more reason to be prudent.

Many people will continue to feel the pinch, and new ones will join them, but others will do well. Doing well does not mean the end to budgeting. In fact, it becomes more crucial to rein in loose spending and to provide funds for investing.

One way to create and manage a budget is to establish each spending item as a percentage of total spending, which itself should be expressed as a percentage of total income. This allows room to increase spending, if necessary, but gives some level of control. Also important is expressing savings and investments as a percentage of total income. And it is still vital to question every spending decision. If this approach is followed, there should be more funds to drive savings and investments, to take care of emergencies, and to address other important financial matters.

Earning more income in 2025, like at any other time, can be beneficial – with proper management. Spending to match the increase in income, or worse, spending more, is not the ideal way to improve financial well-being. Seize, therefore, the opportunities to earn more income, but avoid lifestyle creep.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com