Lifestyle creep is what happens when your standard of living ‘creeps’ up with your discretionary income (i.e. you get a raise), as coined by financial planner Michael Kitces. It can be a problem when instead of prudently saving or adhering to a budget, you start living outside of your means, such as by eating out all the time. Here is a guide to avoiding it and making sure you don’t rob yourself of a better future.
Who’s at Risk and Why?
A related concept is lifestyle inflation, which occurs when you increase your spending when your income increases. When lifestyle inflation happens with each pay raise, people’s debts often grow and make it harder for them to save. Certain people are more at risk of lifestyle inflation, and creep, than others.
Those who are making the transition from being a student to a full-time worker can be vulnerable as the allure of a large pay cheque – and a feeling of self-reliance – convinces them to live – and spend – “for the moment”. More generally, people stuck in uncertain circumstances can be prone to lifestyle creep as they feel unable to plan for the future. Many people go from shared houses to living alone, buying cars instead of using other transport options, living paycheck to paycheck and not leaving money aside for unseen setbacks. Another motivating factor in lifestyle creep is the belief that increased spending will make you happier. Apart from having a spurious foundation in psychological science, the happiness bought often pales in comparison to that gained from financial independence and true prosperity.
Avoiding Lifestyle Creep by Saving
Living above your means will hurt you in the long term. Earnings are not nearly as important as savings in the long term, which is why it’s important to differentiate between your needs, wants, and wasted or excessive spending.
The best way of avoiding lifestyle inflation and creep is to set up spending and saving targets. Automating your savings can help you cap your spending and meet your saving goals. This will help you achieve financial independence at a younger age, have more career flexibility over your life and retire earlier. Creating a set schedule and automatic transferring paycheck money into a separate savings account will help reduce your ability to make impulse buys. Holding that savings account with a separate bank can provide an additional safeguard against premature withdrawals. You may want to use a credit union for your savings account as they generally offer better interest rates for savings accounts.
If you get a raise, try putting the extra money directly into your savings account for the first month as you recalibrate your budget. It’s best to decide ahead of time what types of emergency would warrant withdrawing money from your emergency fund. Major life-changing situations, such as unemployment or serious medical conditions would qualify as good reasons. If you secure short terms to supplement your emergency funds in an emergency, look for ones with clear terms such as those offered online from Captain Cash.
Budgeting to The Rescue
There’s never a bad time to create or revise a budget. Record your expenses and deductions (e.g. taxes) and allocate your money according to well-defined preferences. If you’re new to budgeting, try the 50/20/30 rule. This simple and effective strategy divides your income into 50% for essential expenses, such as utility bills and groceries, 20% to financial priorities such as debt payments and saving contributions, and restricts lifestyle expenses to 30%. Revising your goals and adapting them to new situations is essential. If you need to change your budget, by all means, change it, just make sure you decide two fundamental questions first. Firstly: is this a permanent change to my budget, or a temporary one? If it’s permanent, can it really be justified, and if it’s temporary when will stop? Secondly, will it undermine my fundamental financial goals?
It may sound absurd to younger people, but the earlier you set up a retirement fund, the more time there will be for it to expand due to compound growth, provide you don’t continually jeopardize it with early withdrawals. Consider monthly contributions to your retirement account: an employer-sponsored retirement plan (e.g. a 401(k)) can help you lower your taxable income when it increases by a raise.
Give yourself a chance to live and enjoy your success: just keep an eye on the big picture and don’t let short-term feelings or ambitions get in the way of your overall strategy. Happy saving!
Patrick Herbert works as a personal finance and lifestyle coach rolled into one. He writes about how you can better manage your finances in order to lead a happier, better life.