Making more money immediately puts you at risk of lifestyle creep. The sudden feeling that you can afford nicer clothes, more expensive restaurants, or shop how you want can be a great feeling, but it can rob you of future personal finance goals.
Understanding how to avoid experiencing lifestyle creep is the key to good financial health.
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What Is Lifestyle Creep?
Lifestyle creep happens when you increase your lifestyle to match your income. What used to be luxuries are now the new norm because of your increased income. Lifestyle creep can happen when you receive a raise or decrease in your monthly costs and have more money available in your monthly budget.
Examples of lifestyle creep include excessive spending habits on luxuries, moving into higher rent districts, spending more money on entertainment, taking on more expensive hobbies, or assuming higher-end clothing and accessories are a right.
Lifestyle Creep Signs
Everyone experiences lifestyle creep differently, but here are a few common signs of lifestyle creep:
- Spending money without thinking - You might spend needlessly on disposable items and services and not think twice when before it was a careful decision that required plenty of planning
- Luxuries become necessities - Things that you once used to dream of or relish if you were able to afford them are now commonplace purchases
- New lifestyles - Changing lifestyle habits without thinking, such as eating out daily at work versus packing a lunch, going to the gym versus working out at home, or buying coffees daily versus making your own
- Adjusting to your new norm - The thought of living the way you used to makes you sad
Tips to Overcome and Prevent Lifestyle Creep
Lifestyle creep, or lifestyle inflation, isn't a good option. It robs you of your financial goals, such as saving an emergency fund, retirement savings, or even money for things like the down payment on a car or house.
To avoid robbing yourself of money and hurting your financial health, use these tips to fight lifestyle creep.
Budgeting and Expense Review
To avoid lifestyle creep, don't let expenses take over the newly found money. Instead, as your income increases, budget at least 50% of the money for financial goals, and the other 50% is your choice.
This ensures you don't automatically increase your spending and expenses. Banking at least 50% of the new disposable income helps you reach your financial goals but still allows some room for fun.
Save, Save, Save
Make saving automatic. Set up automatic transfers to your savings account every payday. This way, saving is natural and not something you overlook or spend before you realize you didn't save. Ask your employer about direct deposit into your savings account or set up automatic transfers with your bank.
Goals and Planning
Write down your goals and create a plan to reach them. It's okay if your money goals increase based on your higher income, but make sure you create a plan to reach them.
The key is to look at your overall financial health and reduce your discretionary spending. Making more money doesn't mean spending money on disposable items or services that won't matter. Instead, focus on your future and how this new income can help you reach your goals.
The "Buy List" Method
The 'buy list' method helps prevent impulse purchases you feel entitled to because you have the funds. Instead of buying the items, put them on your 'buy list.' Then, if you still want the item in a week or two, work it into your budget. Don't buy it just because, but instead because it stuck with you throughout that time.
You can also use the list as a 'bucket list' for things you want to buy throughout your lifetime, but it doesn't have to be immediate.
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Treating Yourself With a One-Time Reward
It's okay to treat yourself sometimes. But, whether you treat yourself with a one-time reward for reaching a new income level or occasionally for sticking to your budget goals and not letting lifestyle creep happen, you'll be more likely to stick to your goals.
When you're too strict with your money, you might overspend or 'retaliate' to get back at the strict rules you put on yourself.
Find What's Enough for You
Don't keep up with the Joneses. Instead, figure out what makes you happy. Ask yourself, 'what's enough for me?' It doesn't matter if it's something completely different than your neighbors and friends want or need.
Financial health is personal. What feels good to you financially might not be as financially secure for someone else. Find what makes you happy and stick to it; don't try to maintain certain pretenses to fit in with others.
Stay Away From Dramatic Lifestyle Changes
Don't make drastic lifestyle changes like moving into a more expensive house, driving a more expensive car, or starting expensive spending habits. Just because you're making more money doesn't mean you have to change how you live. Instead, if you keep the same patterns and save more money, you'll have more money for things like retirement accounts, a dream vacation, or other life goals.
Social Life Impacts
Evaluate how who you spend time with affects your spending. For example, if your social circle looks down on you because you don't drive fancy cars like they do or didn't move into a fancier house, consider changing your social circles or spending less time in a negative environment.
You want people in your social circle with similar financial and life goals or who support different opinions. Don't let someone else's opinion of your lifestyle change how you live or increase your discretionary spending.
Mental and Emotional Stability
Taking care of your mental health can help you avoid lifestyle creep. Money and emotions go hand-in-hand. If you're emotionally or mentally unstable, you might needlessly spend money to compensate for it.
This also applies to your money story. If you grew up without a lot of money, or your family didn't know how to handle money, it could be ingrained in your brain to act the same. So take care of your mental health to help your personal finances.
Max Out Retirement Funds
Prioritize saving for retirement in your budget, increasing how much you save based on your income increases. In 2023, you can contribute up to $22,500 in your 401K and $6,500 in an IRA. So if you aren't maxing out your retirement funds, make that top priority before spending on needless items that won't help you in the future.
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Investing Extra Finances
If you've maxed out your retirement savings, consider investing any extra money. Instead of buying a new car, racking up credit card bills, or spending on needless items, invest and make your money grow. You'll have more money for your goals in the future if you choose to invest overspending.
Celebrate Small Victories
Don't be afraid to celebrate small victories. Everyone deserves a pat on the back. So whether you save more money in your bank account, ramp up your retirement funds, or find ways to cut back on spending instead of spending more, reward yourself. Celebrations will motivate you to keep going and reach even more financial goals.
You and Your Money Mindset
Getting to know your money mindset before letting lifestyle creep happen is important. How do you view money? Ask yourself what you think about spending, saving, and future goals. Knowing your money mindset will help you make clearer decisions, including getting help from a financial advisor should be in the mindset to put yourself into more debt.
Shaping a Lifetime of Career Earnings With Early Income Growth
A Federal Reserve Bank of New York study proved that most earnings growth happens early in careers and tapers off as you age. This debunks the myth that career and income growth occurs steadily throughout our lives and keeps pace with inflation.
Managing and Combating Lifestyle Creep With Income Growth
If you stop lifestyle creep even when your income grows, you'll make life more affordable now and in the future. On the other hand, the more you let your lifestyle change according to your income, the harder it is to keep up as life throws you curveballs.
Retirement Expenses Grow With a Rising Standard of Living
Another important consideration is what happens during retirement. If you increase your expenses now, you'll need more money in retirement to maintain the lifestyle. This means you'll need more money saved for retirement, and if you increase your spending, you might not have enough funds to do both.
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Why Is Lifestyle Creep So Destructive?
Lifestyle creep affects your finances now and in the future. You'll increase your bills and 'must haves,' taking money away from other more important financial goals, such as saving for an emergency account, retirement, or other long-term financial goals.
How Do You Prevent Lifestyle Creep Before You Need to Reverse It?
Keep a careful budget and plan what to do with any income increases before you receive them so you don't let lifestyle creep happen. Use a budgeting tool to help determine how much you can increase savings goals and what you can plan for the future rather than increasing your discretionary spending unnecessarily.
Who Can Experience Lifestyle Creep?
Anyone can experience lifestyle creep. It happens when you make more income and don't have to apply it to existing bills or debt. It often happens early in your career, but it can happen if you change careers, get a large promotion, or open your own business and realize immediate success.
Don't let lifestyle creep affect your financial goals. If your income increases or you come into money, figure out the best way to use the funds so you don't rob yourself of financial security in the future. Rewarding yourself is one thing, but lifestyle inflation leads to more problems. Instead, prioritize saving and minimize spending to realize your financial goals.