How can I avoid Lifestyle Creep?
Lifestyle Creep, sometimes known as lifestyle inflation, is the idea that as your income increases, so do your expenses. People often assume they will be able to save more money or start investing once they are earning more. But often, once they are earning more, they find themselves buying fancier clothes, eating at nicer restaurants, and driving more expensive cars. If you aren’t careful, all of these lifestyle upgrades can easily eat up all of the extra income you earn as your career progresses.
Impact of Lifestyle Creep
It’s understandable to want nicer things as you get older and as your career advances. When you get a raise or a promotion, it’s logical to assume that you can afford to spend more with this increased income. In many cases, people start spending more even before getting that first higher paycheck.
The extra income feels like permission to spend a little more. And if it is just a little more in one or two categories, that probably is fine. But if you are “just a little more”-ing on all aspects of your life, you’ll quickly find that there isn’t any left over for saving or investing. And if these little upgrades aren’t done very intentionally, you may find that it doesn’t actually add to the quality of your life all that much.
If you’ve recently received a raise only to realize that it didn’t make it any easier to save, you may assume you were naive to think THIS amount would be enough for you to save, but that surely the NEXT promotion will do the trick. Or maybe you have a salary number in mind. Once you hit $100k, THEN you’ll be able to focus on saving and you will hit the ground running on your 401k.
The idea behind Parkinson’s Law, which says that “work expands so as to fill the time available for its completion”, can also apply to our money. Our expenses tend to expand to meet our income. There are many people with very high salaries, who continue to live paycheck-to-paycheck.
Upgrade Commitment
When considering what upgrades you can afford to add to your life, consider whether it’s a one-time cost or if there are long-term/ongoing costs.
Buying an expensive new handbag is a fairly isolated, one-off decision. Sure, it may deplete your savings, and you have to consider the opportunity cost of spending that money, but you aren’t committing your future self to ongoing payments.
Buying a new car, on the other hand, usually has long-term impacts on your cash flow. If you are taking out a loan or leasing, you are committing your future self to the extra payments each month, along with increased insurance and maintenance costs. In the immediate moment, you may feel very certain that this is the best use of your increased income, but how confident are you that you would make the same decision each month for the life of your car loan?
A little lifestyle increase is inevitable, but you want to be thoughtful of where you let it happen. Once you step up the quality or level of luxury, you quickly get accustomed to it. That becomes your new normal. The idea of having to downgrade can be quite painful. If you went a little overboard with lifestyle upgrades, it’s going to be much harder to cut something out than if you’d just never experienced it at all. Nothing makes a long flight in a coach seat more miserable than having recently flown first class.
Ok, so how do you deal with this?
The key is to create a plan. Yes, there are lots of wonderful things you could spend your money on when you get that next raise. And some of them may genuinely add to the quality of your life. But having money available when you retire is almost certainly going to improve the quality of your life. If you are struggling to pay off credit card debt, tackling that with more effort will also meaningfully improve the quality of your life. So before you start thinking about how you might be able to spend your future income, start thinking about how you might be able to save or invest that future income. These “good habits” need to be thought about ahead of time, not an afterthought, or an “I’ll see what's left once I get that first bigger paycheck”.
First, think about a plan or a goal. If you have a raise on the horizon, how much of it do you want to go towards saving/investing?
If you are wanting to focus on your 401k, consider increasing your contribution rate by a few percentages.
If you are trying to save (an emergency fund or a savings bucket for a dream vacation), set up a separate checking account for that savings goal. Then automate your transfers into the new account.
Ask if your employer will split your direct deposit. Often, you can elect to have your direct deposit split up, so you might have $500 go to your Emergency Fund account, meanwhile, the rest goes to your regular checking account.
Or, if your employer isn’t able to do split direct deposits, you can just set up an auto transfer from your main checking account to your savings account. If you set up the transfer to go through the day after payday, that money will be gone before you know it, so you aren’t tempted to spend it elsewhere.
Creating a plan to save or invest, and automating it is called “paying yourself first”. That saving or investing happens before you have a chance to do anything else with the money.
Then, after the saving/investing is in place, you can start thinking about other uses for your increased income. Are there specific areas in your life that are particularly important? Places where spending a little more on convenience will have a significant impact on the quality of your day? Take your time and think about where your money can have the biggest impact.
If you recently got a raise, or are anticipating one soon, and want some extra support in navigating the income boost, consider working with a coach to ensure that you are effectively using this opportunity to improve your financial life. Schedule a free call with Sarah to see if one-on-one coaching is a good fit for you.
