Lifestyle Creep? Don’t Forget Your Savings!
What is lifestyle creep? Lifestyle creep is when a person spends more as their income rises…buying a bigger house, a new car, going on fancy vacations, buying more expensive food and clothing… Having the financial means to do these things is fantastic, and could be a great motivating factor! I am big on aligning your money with your values and the things that bring you joy; this after all is a big reason you work so hard! However, lifestyle creep is often portrayed in a negative light and can be detrimental to your finances when you spend all of your pay increases and neglect savings. In addition, lifestyle creep often results in life’s previous luxuries turning into “necessities.” Thus, making lifestyle creep more of a problem if you lose your job, feel stuck in job that you don’t like, or to support your current lifestyle in retirement.
As you earn more, how do you keep your spending under control, not damage your long-term finances, and possibly enjoy a “healthy” lifestyle creep?
Do not neglect savings; save as much of your pay increases as you can, especially when you are young.
Increase your retirement savings with your earnings. This will be automatic if you have an employer sponsored retirement plan as contributions are normally based on a percent of earnings: 10% of a $1,000 paycheck is $100 saved, 10% of $1,500 paycheck is $150. If you do not have an employer plan, set up recurring deposits to an IRA and increase these in step with your pay increases.
Always be mindful of spending. Just because you have extra money does not mean that it needs to be spent on goods and services.
Resist the urge to impulse buy
Look at all purchases like you did when you didn’t have much discretionary money; considering want vs. need
Sleep on big purchases, weighing all options and consider whether the purchase is worth it – is there something of better value? How long will it last? Will you like it in a year?
No lifestyle creep without adequate emergency savings. As your earnings increase, put all growth towards emergency savings if your fund is lagging behind.
No lifestyle creep if you have credit card debt. Put your entire increased earnings towards paying down credit cards (after you have an emergency savings fund) and do not spend on discretionary items while in debt.
Pay off other high interest loans with increased earnings after you have built your emergency savings fund and paid off credit cards.
Enjoy your pay increases by following these tips; you work hard for them!
This blog is for general educational purposes and does not constitute financial, tax, or legal advice. Please contact our firm for specific advice applicable to your personal financial situation.