When I finally got out of school and started getting a decent paycheck, my first thoughts were mainly about all the things I could spend the extra money on. That nicer car, a new bike, better hotel and restaurant choices, and more. If you feel this applies to you, know that it’s perfectly natural and very common. In personal finance, the steady increase in spending as your income grows is called lifestyle creep. Some lifestyle creep is good and understandable. After all, part of why we are working hard is to get the things we like. There is the risk, however, that you get used to spending habits that hamper your ability to reach more meaningful long-term goals.
How it happens
Lifestyle creep typically starts when you get a raise or see your checking account growing to higher levels than you are used to. If you have money to spare, the easiest thing to do with them is to spend them. You reward yourself for the hard work you have been doing. A nicer car, better clothing, a first-class upgrade, you go out to restaurants more often, and so on.
The problem isn’t that we do all this. The real problem is that left unchecked, lifestyle creep can create bad habits. You get used to the lifestyle and what you initially thought was a reward now becomes a necessity. Slowly, you find yourself making twice as much money but still haven’t started saving for important things like retirement or your kids’ education.
A matter of mindset
The biggest issue with lifestyle creep is one of mindset. You start viewing discretionary and luxury expenses as necessities or something you deserve and overlook the opportunities that saving more could provide you. As a result, you may end up prioritizing spending relative to achieving long-term goals. If you are a high earner (find out here) and you often feel like you don’t know where your money is going, then lifestyle creep may be a problem.
Make a plan
The best tool to limit or eliminate the negative effects of lifestyle creep is a financial plan based on your values and priorities, even a simple one. The main benefit of a financial plan is to change your mindset, from just “going through” life to “having a strategy” to make the most out of your resources, including money. Lifestyle creep is a result of not having a strategy. Going through the process of identifying your values and setting measurable goals and actionable items can change your mindset. Kowing what’s really important to you can help you focus on it and lead to better decisions today. So our first advice is to think about why money is important to you and start planning.
Be aware of your spending habits
Lifestyle creep can start small and doesn’t have to be about luxury goods. It generally includes what we call discretionary spending. Discretionary spending isn’t just about things that you don’t need. It also includes spending on something more than what is strictly necessary, like buying a pro bike when you are only cycling once or twice a week (ouch!). The key to deciding whether some spending is good or bad, however, depends on your values and priorities. If fine wine is your passion, spending on wine is not a bad thing. To find out how well it aligns with your values, track your spending for a while. Try this challenge: write down all your expenses for 30 days. At the end of the period, compare your spending to your values and priorities. Is your spending in line with the things that matter in your life? After tracking your spending for a while, give budgeting a try.
Some other tips to control your spending
If you have worked on your simple plan and started tracking your spending, try some of these ideas to help you reduce the risk of lifestyle creep.
- Pay yourself first. Saving is not a burden if you realize you are buying a slice of your most important goals. Automate some savings each month. You can reward yourself for this good behavior by also setting aside some ‘fun’ money.
- Use goals-based investing. Writing down goals and setting savings aside for each goal helps you remind you what’s really important to you and gives you meaningful feedback. For example, if you are on target for your goals and find yourself with extra cash, you don’t feel bad about spending more.
- Make gradual changes. As you track your spending commit to small, realistic spending reductions and commit that money to savings. Getting started is big progress.
- Spend intentionally. Avoid spending for the wrong reasons, like things or features you don’t need just because you can afford them, but don’t feel bad about buying something expensive if you actually value it. Make a list of your monthly wants and don’t buy anything right away. Let it sit and go back to it after a couple of days to prioritize them.
- Beware of debt. Debt is a commitment. Just because you have good credit and can afford to make the payments, it does not mean you should get the loan. When you take out debt, you are committing yourself to make payments for the duration of the loan. Every additional dollar of debt you have to pay back is a dollar you could use on something else.
Everyone deserves to indulge every now and then, so you shouldn’t feel bad if you don’t think you could live the same way you did during college or grad school. The key is to be aware of your spending habits, making sure they align with your values, and to understand the opportunities that saving today can buy you tomorrow.
Until Next Time!
Massi De Santis is an Austin, TX fee-only financial planner. DESMO Wealth Advisors, LLC provides objective financial planning and investment management to help clients organize, grow and protect their resources throughout their lives. As a fee-only, fiduciary, and independent financial advisor, Massi De Santis is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.
