Have you recently started making more money or paid off certain debts that left you with more discretionary income in your pocket? Congratulations! This situation can be a huge relief, and can make many earners feel like they can finally afford to do some of the things they couldn’t quite fit into their budget before. However, if you’re not careful, those exciting and fun new expenditures can quickly add up to more than you can sustain, and may even lead you to accumulate unnecessary debt or prevent you from reaching other financial goals.
Are you affected by lifestyle creep? Do you:
Often wonder where your money has gone at the end of the month, despite your increase in available funds?
Have an increased feeling of need for things that you used to consider treats or occasional splurges?
Find yourself dipping into savings or having to use your credit card for purchases or bills that have become routine?
According to Experian, “Lifestyle creep can take the form of an ever-escalating taste for the finer things or a growing slate of regular expenses that sap money from your savings account.”
Lifestyle creep is a tricky problem to have because it’s often backed by the idea that a person feels they’ve worked hard, reaped the rewards of that labor, and deserves to finally enjoy themselves financially. The even trickier component is that when you have more disposable income, you absolutely should adjust accordingly, and that adjustment may afford you some of the finer things you have your eye on!
The trick to avoiding lifestyle creep is to adjust your cash flow according to some basic but integral rules of personal finance. We’ll go over some tips and tricks to help you enjoy your new income without breaking your budget!
How to Avoid Lifestyle Creep
Avoiding lifestyle creep requires knowing it may be an issue first. Then, with that recognition, you can work toward avoiding lifestyle creep with these strategic steps.
Bank the Extra
The easiest way to sidestep lifestyle creep is to automatically bank the extra. Let’s say you received a 10% increase in salary thanks to a promotion. For someone making $100,000 annually, an additional $10,000 may seem like a significant bump on paper. However, after accounting for taxes, that $10,000 may quickly dwindle to $7,000 to $7,500, leaving an extra $625 per month. That isn’t chump change, but it can go quickly if there isn’t a plan for using those funds wisely.
Banking the extra in this scenario may be partially taken care of, without giving it much thought. Individuals with a retirement plan through work, like a 401(k) or 403(b), may have contributions set up on a percentage basis instead of a specific dollar amount. In this case, contributions automatically increase when salary increases.
For everything else, however, it pays to be intentional about where the extra money goes. Low-hanging fruit may include increasing automated additions to savings each month or pay period, paying more each billing cycle on an outstanding credit card or student loan balance, or establishing or increasing contributions to a non-retirement investment account.
Any of these options can be beneficial to your long-term financial well-being, while also helping minimize the impact of lifestyle creep.
Revisit Your Financial Plan
Whenever income increases, this should be a trigger to check in with your overarching financial plan. At EViE Financial, we work to create financial plans that are actionable but also fluid, meaning they adjust as life changes. This is done, in part, through a bucket approach, meaning we define which buckets need to be established and filled (or depleted in the case of debt), then determine how many dollars need to go into each of those buckets to achieve specific goals.
An increase in income is one of those adjustments that prompts evaluating your buckets. Ask yourself or your planner the following:
Are other buckets needed for the short-, mid-, or long-term? For instance, maybe an increase in salary allows a family to start saving toward a child’s college goals.
Based on progress toward filling up or depleting a bucket, do we need to allocate more dollars to one or several buckets? As an example, that pesky credit card bill that just doesn’t seem to go away may be in focus with a few extra dollars each month.
Can I frontload a bucket now while income is high to speed up achieving a goal? In some instances, adding more to a single bucket like emergency savings or home down payment while leaving other buckets the same can expedite reaching a milestone or goal in your financial life.
Keep a Budget
One of the many reasons lifestyle creep becomes an issue is because, for some, an increase in income means a budget gets thrown out the window. The thought here is that spending was fine before, so how could it be any worse with a higher paycheck? The reality is that extra spending creeps in without warning, and not having — and sticking to — a budget can derail financial intentions quickly.
A salary increase or income boost should prompt a review of the budget. Take time to ask yourself the basics, like how much is being spent on dining out or groceries, or how much is used for entertainment, travel, or lifestyle spending. Consider using a budget tracker or financial planner to help determine average spending, then come up with upper limits for discretionary spending categories. A smart rule of thumb is to keep “extra” spending — that is money spent on non-essentials — to no more than 30% of income. The rest is used to cover required expenses, including housing, food, debts, and savings.
Manage Lifestyle Changes Gradually
At EViE Financial, we are huge proponents of the live-your-life approach to financial well-being. That means our financial plans are built around realistic goals that allow for spending in the areas of life that mean the most to our clients. For some, that involves a significant budget for self-care; for others, that includes spending on experiences like travel. Others feel a draw to charitable contributions and community impact. No matter the desire, we work to carve out the appropriate buckets so these wants are covered. However, it is necessary to work toward these types of lifestyle desires gradually, not all at once.
A hard-earned raise, promotion, or other influx of extra cash can best be used to fill these buckets over time.
It helps to work backward in this area. Start by adding a line item for lifestyle needs or wants to your budget and determine how much money can truly go toward these objectives. For example, if you have an additional $300 per month that isn’t allocated toward savings, debt repayment, or other obligations, direct the funds to your lifestyle line item. As other goals are accomplished, funds can be reallocated to add more to the lifestyle need or want. Be sure to monitor spending each month to ensure spending stays in check for these extras.
The Bottom Line on Lifestyle Creep
A bump in income is something to be celebrated and enjoyed, and your hard-earned dollars should be used to do just that. However, reaching short- and long-term financial goals is not a given simply because your paycheck is higher. Lifestyle creep can quickly steal away potential progress toward filling your financial buckets if a realistic and personalized plan isn’t in place.
To improve chances for success, plan to bank the extra dollars when a raise or promotion happens. Also, take the time to revisit your financial plan and budget accordingly. Finally, make gradual instead of immediate changes in lifestyle spending. These strategic steps pave the way for avoiding lifestyle creep anytime income increases. And if you’re finding it difficult to manage lifestyle creep on your own, reach out to us! We can lend a hand to refresh your financial plan, define and create a strategy for your buckets, and put you on the path toward financial well-being.