Did you get a raise, but you’re not saving more money? Is your spending increasing along with your salary? If so, the reason may be lifestyle creep (or lifestyle inflation), a common scenario where your discretionary expenses go up as your income rises. It happens gradually, without you realizing how much more money you’re paying out than before your income rose. If you don’t take control of the situation, you may jeopardize your financial plans and stability. Awareness of the problem is the first step to putting you back on the right path.
How Does Lifestyle Creep Happen?
Often it starts like this: You got a promotion, raise, or new job, or paid off a debt. The extra money makes you feel more comfortable with spending. You buy things you couldn’t afford before and upgrade your standard of living. Maybe you start going out to eat more often, booking big vacations, giving generous gifts to your kids or grandkids, or buying more expensive clothes, a car, and a home. It’s a reward for your hard work. You may also feel pressured to keep up with the lifestyle of your neighbors, friends, or family.
Expenses inch up slowly. You get used to spending more, and some of it becomes “necessary,” not discretionary. You can’t simply stop paying higher insurance, maintenance, and taxes on your new car and large home.
Lifestyle creep can affect anyone, from college grads getting their first full-time job to retirees trying to support a more costly lifestyle on less income.
What Are the Risks?
If your spending starts to outpace your income, you’ll eat into your savings and/or increase your debts, making it harder to reach your financial goals and affecting your financial stability. Even worse, if your income drops for any reason, you’ll end up in a deeper hole because your expenses are higher and may not be so easy to reduce quickly.
How Can You Keep Lifestyle Creep in Check?
If you want to avoid lifestyle creep, there are a few key steps to take:
- Determine Your Priorities and Goals. Know what matters most to you, whether it’s saving for retirement, buying a house, paying for college, reducing debt, or something else. Use those goals to guide your spending decisions.
- Create a budget. Detail your income and expenses, and consider what adjustments are needed to achieve your goals, as well as how to allocate your funds to your various priorities.
- Automate Savings, Investments, and Debt Payments. Set up automatic payments to your retirement accounts, savings account, emergency fund, and investment portfolio. If your income increases, adjust your contributions before you have a chance to use the extra money for something else. You should also automate debt payments so they are always paid.
- Track Your Spending. Regularly review where your money is going. There are apps you can use to help with this, or simply create a spreadsheet.
- Celebrate Your Wins. It’s okay to reward yourself if you got the promotion or paid off your mortgage.You don’t have to save every dime.You just want to be thoughtful about how you use the money.
- Work with a Professional. A daily money manager, financial planner, and/or accountant can assist you as needed with creating a budget, monitoring expenses, developing a financial plan, reducing taxes, and other tasks. They can help you make well-informed decisions and stay on track.
You shouldn’t feel guilty about wanting to enjoy your hard-earned money. However, when your spending jeopardizes your future, you should step back and consider what’s most important to you.
If you or someone you care for could use help managing day-to-day finances and staying focused on long-term goals, contact me for a free consultation.
