So, you’ve recently landed a new job or received a well-deserved raise – congratulations! With your increased income, it might be tempting to start celebrating right away. But before you dive into spending your newfound wealth, it’s essential to ensure you’re still on track with your financial goals and avoid falling into the trap of lifestyle creep.
What exactly is Lifestyle Creep? Lifestyle creep occurs when your discretionary spending on non-essential items increases alongside your rising income. It’s that feeling when you begin earning more and gradually abandon your frugal habits because you can now afford pricier things.
Avoiding lifestyle creep can be a challenge. As your income grows, it becomes increasingly difficult to stick to your previous frugality and avoid splurging on unnecessary items. This creeping inflation of your lifestyle can significantly impact your savings and investments because, even as your expenses and income increase, the amount you can set aside for savings or emergencies remains relatively constant.
In essence, your savings rate stays the same or may even decrease as you earn more.
The Perils of Lifestyle Creep Imagine you graduate from college and land a stable job, earning $5,000 per month, or $60,000 annually. Since you’re fairly frugal, you manage to save $1,000 each month while covering your living expenses.
Fast forward a decade, and your career has progressed; you’re now earning $10,000 monthly, or a whopping $120,000 yearly. That’s an impressive salary, and you’re doing well for yourself.
However, the issue with lifestyle creep arises if your expenses have increased over those ten years as your income grew. Perhaps you bought a larger house, acquired your dream car, and indulged in a few luxuries. Now, when you analyze your expenditures, you’re spending close to $9,000, yet you’re still saving $1,000 each month.
At first glance, this might seem fine because you’re stashing away $12,000 annually into savings. But consider that if you had maintained your previous spending levels, you could have saved $72,000 annually.
This gradual increase in expenses is why lifestyle creep can pose a genuine threat to your financial well-being. Instead of accelerating your wealth accumulation, you might end up spending more money without even realizing it.
Now, let’s explore several ways to steer clear of lifestyle inflation and stay on the path to bolstering your net worth.
- Recognize the Existence of Lifestyle Creep The first step in battling lifestyle inflation is acknowledging its existence and understanding that it can happen unless you remain vigilant.
Pay particular attention to your spending habits when you receive a raise or bonus. The temptation is to splurge because there’s extra money in your bank account. It’s easy to rationalize increased spending if you don’t think it through.
To counter this, question whether there’s a genuine need to spend that money. If not, set it aside and look for investment opportunities. Simply being aware of the phenomenon of lifestyle creep can make you more likely to avoid falling victim to it.
- Monitor Your Expenditures Maintain a monthly budget that tracks all your income and expenses. You can do this with a simple spreadsheet or by using an automated financial tracking tool. This practice is essential to fend off lifestyle creep.
Ideally, you’ll have budget data that documents your expenses from your very first job. Over time, you can compare your costs to see how they’ve grown as your income increased.
Keep in mind that the cost of living typically increases by around 2% each year due to inflation. Certain costs beyond your control, like higher gas prices, may also rise. Pay attention to these minor cost increases and mitigate them, but remember that they aren’t true lifestyle creep.
Lifestyle creep revolves around non-essential spending, such as leisure activities, luxury items, and travel. In your budget, create a separate category for these expenses so you can identify whether they tend to rise over time.
- Pay Yourself First Now that you have a budget in place, you should be able to determine the percentage of your income allocated to savings. Saving 20% of your income is a good starting point, but those aiming for early financial independence might save 50% or more.
Whenever you receive your paycheck, make it a habit to pay yourself first by transferring your 20% (or more) into your savings account. Afterward, allocate your funds for living expenses. Anything that remains can be used for discretionary spending if you wish.
The key is to increase your savings rate each time you receive a raise. Gradually boost your contributions to your retirement account by 1% each year. Continue to save a greater proportion of your income as you earn more.
Remember, the goal is to elevate your savings rate as your income rises while maintaining flat expenses. Paying yourself first reduces the temptation to spend money frivolously.
- Systematically Elevate Your Lifestyle As you grow older and your income increases, there comes a point when you no longer want to subsist on ramen noodles and peanut butter sandwiches. It’s perfectly acceptable to enhance your lifestyle moderately to enjoy the fruits of your labor, as long as you do it prudently.
As your income climbs, progressively increase your spending in areas that significantly enhance your quality of life. Better quality of life can result from improved creature comforts, food choices, or living conditions.
It’s entirely acceptable to embrace a slight degree of lifestyle creep to achieve a basic standard of living. However, don’t go overboard; approach this systematically by identifying specific areas where you want to upgrade. Establish a spending cap to ensure you don’t exceed your limit.
- Define Your Goals Create long-term financial goals to guide your life’s ambitions. These objectives could encompass significant life events like marriage, homeownership, early retirement, or globetrotting adventures.
Detail your goals and determine the amount of money necessary to achieve them. Additionally, establish a timeline, whether it’s five years down the road or three decades away.
Keep these goals at the forefront of your financial decisions. By avoiding lifestyle creep early in life, you can make these aspirations attainable in the future. If you wish to retire early or use your money for other sources of happiness, minimize your current spending.
- Allocate an Extra Budget for Enjoyment Endless saving without any present-day enjoyment can become tiresome. To avoid burnout, make sure to relish every aspect of your life. Don’t feel guilty about spending a bit more to experience life, travel, and do things that bring you joy.
To prevent substantial lifestyle creep while doing so, establish a monthly budget for enjoyment. After paying yourself and covering your living costs, set aside a small sum for discretionary spending.
By maintaining a “fun” budget, you can still relish your current lifestyle without sacrificing it in favor of saving. A budget also helps you avoid lifestyle inflation by curtailing an increase in discretionary spending.
- Surround Yourself with Like-Minded Companions Direct and indirect peer pressure can be hard to resist, especially among friends. Some people naturally lean toward spending more, whether it’s on upscale dining or extravagant new gadgets. Hanging out with such friends can lead to overspending as you attempt to keep up and mirror their lifestyle.
Instead, strive to socialize with individuals at a similar stage in their financial journey who comprehend the value of living below their means. This doesn’t imply that you can never spend time with affluent friends, but be mindful that their spending habits may encourage lifestyle creep.
