It’s a great feeling when you finally start to gain a little bit of financial independence. Your job is going well, you’re seeing more in your paycheck each year, your bank account is healthy, and you’ve got a little extra money to put towards the things you want, instead of just the things you need. That’s a good position to be in, but it can actually have it’s dangers, too. Making more money can lead to what’s known as “lifestyle creep,” which can end in a blown-up budget. So what is lifestyle creep, and how can you avoid it?
What Is Lifestyle Creep?
Hey! What’s that behind you? Don’t freak out: it’s that extra money you’re making now that you’re more established in your career creeping up on your budget. You might be past the days of ramen, roommates, and happy hours (ok, maybe you’re not above a good happy hour), but if you take a close look at your finances, you might find that you’re somehow not reaching your financial goals, or saving as much as you thought you would be.
The culprit could very well be the phenomenon known as lifestyle creep, or lifestyle inflation. Simply put, lifestyle creep happens when an increase in your income leads to an increase in your discretionary spending – you’re making more, so you start spending more. Or maybe you’ve paid off a big debt and you feel a financial burden lifted, and are jazzed by those hundreds of extra dollars in your bank account.
It might mean slowly acquiring a taste for the finer things in life, being more free with how you “treat” yourself, or an ever-expanding list of hobbies that suck money from your bank account.
It can start small: you order better entrees when getting takeout (and you start treating yourself to takeout more often), you buy those shoes you’ve been eyeing up, you trade in your yoga mat and dumbbells at home for a gym membership, maybe even with some personal trainer sessions thrown in for good measure. You think, “Why not? I’ve been working hard, and I deserve it – and I can afford it now!”
Yes, we agree, you have been working hard and it’s great that your hard work is paying off, but here’s the thing. Before you know it, you’ll have every new gadget that you see, a subscription or membership to countless services, a higher and higher rent, maybe even a second car payment. But what you will also see is a dwindling emergency fund, an anemic retirement fund, and nothing saved for big things like a down payment on a house.
Is Your Lifestyle Creeping Up On You?
If you’re not careful, lifestyle creep can be the ultimate killer of building your savings, and your long-term wealth. But it can be tough to spot, as it tends to happen gradually (remember that one pair of shoes that wouldn’t make a difference?): “[Lifestyle creep] happens so slowly, people don’t even necessarily realize it’s happening until they stop and take a good look at their money,” says Allison Baggerly, founder of the personal finance site Inspired Budget. So what should you be looking out for?
- Mindless rather than intentional spending – We’re not saying you can’t spend any of that hard-earned cash, but experts agree that, as Mary Lyons, an investment advisor and founder of the Benchmark Income Group in Dallas points out, “On the one hand, it’s only natural to increase your spending as your income rises. After all, we work hard to buy and do the things we love in life. It’s when that higher spending happens mindlessly, rather than intentionally, that it becomes problematic.”
- Forgotten financial goals – You’re earning steadily more, but not saving steadily more, or, even worse, you might still feel like you’re living paycheck-to-paycheck.
- Budgets that are getting blown up – Maybe you used to have a pretty strict grocery budget, for example, but now you’re consistently spending $50-100 more on each shopping trip. And maybe you’re going hog wild with your food budget in other ways: eating out more often, or not blinking an eye at spending $20 a day on lunch – and forgetting that that $20 a day adds up to $100 a week just on lunch.
- A “no going back” attitude to your lifestyle – If the things you used to think of as luxuries or as aspirational seem like necessities to you now, and you can’t imagine going back to the way you used to live, your lifestyle is definitely creeping up on you. “The telltale sign of lifestyle creep is the mental or audible reflection, ‘How did I ever make it on less?'” says Katie Waters, certified financial planner at Stable Waters Financial.
Avoiding the Creep
The tough thing about lifestyle creep (other than the slow, creeping pace of it, which can make it something you’re less likely to do something about) is that it can actually feel like progress. Like you’ve made it, you’ve reached your goals, you’ve arrived. And, like we said, no one is saying that you can’t improve your lifestyle, or spend some of your money on the things you want. In fact, some financial experts give you a full 30% of your budget for discretionary spending, if you follow the popular 50/20/30 budgeting rule (the other 50 and 20% go towards necessities and savings, respectively). The problem is that if you’re mindlessly spending in a way that outpaces your savings, you could end up in trouble further down the road.
So speaking of budgeting, and taming the creep, let’s take a look at some other ways you can avoid lifestyle creep and its effects on your financial future:
Open your eyes and take a good, hard look
The first thing you should do if you feel like lifestyle creep has gotten its claws into you is to actually confirm it. This first step might not feel great, but it’ll put you in a better position to move forward with intention. Start by auditing your monthly spending – you might be surprised by what you see, and might feel ready to do some trimming.
So, next, you can actually start to do that trimming: we’re looking at you, 8 separate subscriptions to streaming services and unused premium gym membership. Finally, really have a think about how you’ve been spending, and what you’ve been spending it on. Back this up by gathering up all of that extra stuff, and doing some decluttering while you consider how spending on all of this (now unused) stuff hasn’t brought you closer to living your best life. Try selling what you don’t need, and thinking about ways you can downgrade, like to a car with payments you can actually afford.
Stick to a budget
Sure, spending is fun and budgets are boring, but it’s got to be done. The simplest and most general budget you can stick to is the 50/20/30 budget from above; from there, you can break down the 50% you’re spending on necessities into a smaller budget. So, look at your rent/mortgage and utilities (things that aren’t likely to change much), and then figure out money for the rest, like groceries.
Automate your savings
Not sure you’ll actually put aside that 20%? Hey, it’s 2022, and with digital banking literally at our fingertips, there’s no excuse not to automatically put money into your savings account each month.
Be aware of mindless vs intentional spending
As we said above, spending can feel good. In fact, you might be an emotional spender, and you’re not alone: our brains perceive shopping as exciting or new, which lights up our brains’ dopamine receptors, and certain things might trigger your responses more than others. Be aware of what your triggers are, and keep a list of your actual dream purchases on things or experiences, and ask if those impulsive, mindless purchases are helping you get there (or reach your other goals, or even actually making you feel good).
And, remember, this doesn’t mean you should never upgrade, but be intentional with how you’re upgrading, and save your hard-earned money for upgrades that help you:
- Feel less stressed
- Improve your relationships
- Save time
- Be more genuinely happy
- Improve your skills
- Reach your health goals
- Work toward long-term financial goals
Plan ahead for your spending
This follows on the point above. If you want to make some big purchases or big lifestyle changes, don’t do it the moment you start earning more! Wait on that much bigger apartment, or luxury car: consider planning a big purchase at least three to six months in advance, then you can evaluate whether the purchase is still worth it as time passes. Doing this also gives you more time to save up for that big expense, and will mean you’ll have enough extra money for your other needs, too.
We’ve talked a lot about dealing with discretionary spending, but what about those less fun ways to make your money work for you? What are your financial goals for the future? In order to get where you want to go, you have to have a plan, so set aside time to figure out what your financial goals are and how you want to prioritize them. Maybe you want to build an emergency fund, save more for retirement, set aside funds for a vacation, pay down debt, or save up for a down payment on a house. Whatever it is for you, once you’re clear with yourself, you can create a plan for how you’ll get to those goals as you earn more money, maybe by paying off smaller debts, or setting aside a percentage of your increased income.
Put your pay raise into your “wealth snowball”
If your pay raises have settled into the regular old standard 2.5% to keep pace with inflation, pretend you’re making the same amount you were before the raise. Take that “extra money” and save it, or put it towards something on your list that you need or want.
Limit your revolving debt
Matching the pace of your credit card spending to the rise in your income is a great way to become a victim of lifestyle creep – it’s just too easy to overspend. Not only that, but having too much revolving debt can also hurt your credit, which will make it harder for you to recover from financial setbacks, and can make it harder to secure the best terms on new debt such as a mortgage or car loan.
Remember to treat yourself!
If we’ve been sounding pretty strict, it’s only because it sometimes takes some hard truths, and a serious plan, to get yourself back on track. But, don’t worry, you can avoid lifestyle creep without cutting everything that falls into the “fun” category out of your life. In fact, most financial experts agree that It’s important to enjoy the process of working toward your financial goals. According to Clarissa Moore, owner of the personal finance site the Budget Queen, “I don’t believe you should be sacrificing everything. Do what you want to do, but do it in moderation and always be mindful of those goals.”
So yes, you can have those experiences that you couldn’t have when you were earning less money, and you can buy that pair of shoes or add an extra side of guac, we won’t tell. Just be mindful of your spending, and don’t let any fiendish financial surprises creep up on you down the road.
Is your lifestyle creeping up on you? We want to hear from you!