Lifestyle Creep is a Slippery Slope

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By: Rich LeBranti

Suddenly you’re paying for a house that is too big, or a lease on a pickup truck you don’t use or just a membership to that fancy gym that you haven’t had the time to take advantage of yet. If your regular expenses are being paid for by credit cards or you can’t seem to save money at the end of each month, you might look toward “lifestyle creep” as the culprit. While it is easy to understand what lifestyle creep is and how it happens, it is still dangerously common among young professionals and those midway through their careers. 

Lifestyle creep or lifestyle inflation happens when you begin to earn more, and your spending increases right along with those paychecks. A new pair of shoes, a nicer apartment, a fancy car. These types of splurges are just the type of choices made by those who are falling victim to lifestyle creep. While, on its face there is nothing wrong with improving your quality of life as you begin to earn more, it is monumentally important that you have budgeted for your existing expenses, have a three-month emergency fund and have made a plan for saving for your retirement. 

Since about 2015, financial advisors have been using a time horizon of 100 years old to plan for their clients’ retirement. That is a lot of years past the time you may be planning to retire. With that comes rising medical costs as you age, inflation and the unknown of how you’d like to live in retirement and what you’d like to experience (and what it all costs). Planning for, saving for and investing in your retirement savings accounts is paramount to protecting your well-being in retirement. 

Lifestyle creep doesn’t happen overnight. Sometimes it’s hard for people to notice that it is even happening until suddenly they’re over extended financially. Putting off saving in order spend on the things that you want or feel you need right now is a slippery slope and suddenly you may find yourself way behind your goal when it comes to your retirement plan.

When your expenses equal your income and there is no room for savings, you are putting yourself in a position where you don’t have any buffer when something comes up that you really do need money for. That is usually when people begin getting into debt. Using credit cards to pay for monthly expenses or using credit cards to fund unexpected large expenses and not being able to pay them off completely each month is the risk. The interest on your credit cards alone is now causing you to be paying 15% more for each item you buy. 

So, what can you do to avoid lifestyle creep? Here are three recommendations that we think curb the problem: 

1. Make a Budget

The only way to understand and change how you spend your money is by recording what you are spending and keeping track of it monthly. You must first put continuing and unavoidable expenses as the first priority (rent or mortgage, car payment, insurance, utilities, student loan payments, etc.). Then you must consider what you will need for household items like groceries, toiletries, cleaning products, pet food, etc. Once you have a handle on what those relatively fixed expenses are, then you need to determine what you will be saving each month for your emergency fund and for your retirement savings account whether it is a 401(k), IRA or another vehicle. Now is the fun part: Figuring out how and when to spend your disposable income! Our recommendation: Always choose experiences over stuff. Those memories last a lifetime. 

2. Try NOT to increase your expenses every time your income goes up.

Just because you’re making more money doesn’t mean you need to spend more, especially not immediately on frivolous items. It is good to set goals for hard earned wage increases and reward your good work with something that has true value or true necessity. You may be planning to get married, have a child, buy your first house or your first born is going to college in a few years. Using that raise as a vehicle for ramped up saving is a great way to curb your impulses and plan for a bright future.

3. The Gig Economy 

Having a side hustle or the opportunity to work freelance outside of your nine to five is a great way to earn extra cash and a great way to save if your paycheck and your expenses simply must stay neck and neck for the time being. According to a recent article in Forbes, the average side hustle earns workers about $8,000 per year in extra income. That would more than fully fund a Roth IRA for the year and not take a bite out of your paycheck. 

Spending on new toys (big or little), memberships you can’t really afford, and other frivolities can lead you to an outcome that may make you have regrets down the line. Prudence and patience are key to avoiding these common mistakes that lead to lifestyle creep. We hope that you take heed of our recommendations and that implementing them into your life helps you stay on the track to financial freedom.