So you just got a new job or raise, congratulations! You’re making more money now and it is time to celebrate, right?
Before you start spending your new money, make sure you are meeting your financial goals first by avoiding lifestyle creep.
What is the Definition of Lifestyle Creep?
Lifestyle creep is when discretionary spending on non-essential items increases as income increases. It is when you start to earn more money and stop using your previous frugal habits because you can afford more expensive items.
It can be hard to avoid lifestyle creep. Once you start to earn more money, it can be tough to pinch pennies and remain as frugal as you previously were.
Also, known as lifestyle inflation, lifestyle creep can have a serious impact on how much you are able to save and invest. As your expenses and income both increase, the amount of money that you can put toward an emergency fund or investments remains the same.
This means that your savings rate remains the same, or potentially decreases, as you make more money.
Dangers of Lifestyle Creep
Let’s say you graduate college and get a solid job earning $5,000 per month, or $60k per year. Since you’re pretty frugal, you are able to save $1,000 per month while spending the rest on your living expenses.
Fast forward 10 years and you have moved up in your career. You are now earning $10,000 per month, or a whopping $120k annually. That is an awesome salary and you’re doing well.
However, the problem with lifestyle creep is if your expenses increased during those 10 years as you got raises. Maybe you bought a bigger house, got that dream car, and splurged on a boat. Looking at your expenses, you’re now spending close to $9,000 but still saving $1,000 per month.
This can sound ok on the surface because you’re still socking away $12,000 per year into your savings. But, consider the fact that you could have saved $72,000 per year, if you had kept your spending on your previous levels.
This increase in expenses over time is why lifestyle creep can be dangerous to your finances. Instead of building your wealth more rapidly, you may end up spending more of it without even realizing.
We’ll go through a few ways you can avoid lifestyle inflation to keep you on the best path of building your net worth.
1. Be Aware of the Lifestyle Creep Phenomenon
The first step to combating lifestyle inflation is being aware that it exists and can happen if you don’t think about it.
Be especially aware of spending more money after you get a raise or bonus. The temptation is to go out and spend money because you have some extra cash in your bank account. It is easy to rationalize spending more if you don’t think too hard about it.
Try to avoid that but asking yourself if there is a true need to spend that money. If not, keep that money separate and look to invest it. By simply being aware of the lifestyle creep phenomenon, you’ll be more likely to be able to avoid it.
2. Track Your Expenses
You should have a monthly budget that tracks all of your expenses and income. This can be done with a simple spreadsheet or with an automated financial tracker, but is essential for avoiding lifestyle creep.
Ideally, you will have budget data to show how much you spend on expenses starting with your first job. Over the years, you can then compare your costs to see how dramatically they have gone up as your income increases.
Of course, the cost of living increases every year roughly by 2% due to inflation. There are some cost increases that are out of your control, like your oil company charging more per gallon. Be aware of these smaller cost increases to mitigate them, but this is not true lifestyle creep.
Lifestyle creep is based around non-essential spending, like entertainment, toys, and travel. Track these expenses in a separate category in your budget so that you can see if they tend to go up over time.
3. Pay Yourself First
Now that you have your budget, you should be able to see the percentage of your income that you are putting towards savings. Saving 20% of your income is a good starting point but people interested in reaching FIRE early may save 50% or more of their income.
When you get your paycheck, get in the habit of paying yourself first by moving your 20% (or more) to your savings account. After that, pay your living expenses. Anything left over can be used for discretionary spending, if you really want it.
The trick to doing this right is to increase your savings rate every time you get a raise. Increase your contribution to your retirement account by 1% a year. Continue to proportionally save more money as you make more.
Remember, the goal is to increase your rate of savings as your income increases and keep your expenses flat. Paying yourself first helps to reduce the temptation of spending it frivolously.
4. Upgrade Your Lifestyle Systematically
As you get older and start to make more money, there will come a point where you just don’t want to be eating ramen and peanut butter sandwiches any more. It is ok to upgrade your lifestyle to enjoy your higher income, within moderation.
As you start to make more money, gradually increase your spending in certain areas that improve your life the most. Better creature comforts, food, and living arrangements will all make your life more enjoyable.
It is completely fine to enjoy a small amount of lifestyle creep to bring you up to a basic standard of living. Just don’t overspend and let it get out of hand.
Approach this systematically to identify key areas you want to upgrade in your life. Then, create a cap on your expenditures to make sure you don’t go above that level.
5. Set Your Goals
Come up with your long-term financial goals for what you would like to accomplish in life. This can include big life events like getting married, buying a house, retiring early, or traveling the world.
Whatever you want to do, write down your goals and figure out how much money you need to accomplish them. You’ll also want to get a sense for timeline – is it 5 years out or 30?
Keep these goals in the forefront of everything you do with your money. Avoiding lifestyle creep early in your life will make these goals possible later. If you want to retire early or spend you money on other things that make you happy, minimize your spending today.
6. Budget in Extra Fun
It can get tiring if all you do is save and not have fun in the present. To prevent getting burned out, make sure you are enjoying all aspects of your life. Don’t feel bad spending a little extra money to have experiences, travel, and do what makes you happy.
To avoid serious lifestyle creep while doing this, create a monthly budget for your fun. After you have paid yourself and your living expenses, put aside a small amount that you can use however you want.
By having a “fun” budget, you can still enjoy your current lifestyle without sacrificing it for the sake of saving. A budget also helps you prevent lifestyle creep by avoiding an increase in discretionary spending.
7. Hang Out with Like-Minded Friends
Direct and indirect peer pressure is often difficult to resist, especially among friends. Some people just like to spend money , whether it is a fancy meal out or an expensive new gadget. Hanging out with these type of people can cause you to overspend as you try to keep up and mimic their lifestyle.
Instead, try to spend time with people who are at a similar place in their financial journey and understand living below your means. This doesn’t mean you can’t ever hang out with wealthy friends, but just be aware that they may be a force causing lifestyle creep.
8. Fund Your Lifestyle Creep with a Side Hustle
If you really want that luxury car or nice pair of shoes, create a new income stream to pay for it. Make sure that you do not touch your primary income when paying for extra expenses. Your primary goal should still be able to increase your rate of savings over the years while keeping your expenses flat.
Create a side hustle or passive income stream to pay for any additional fun expenses. This effectively increases your income while keeping the additional money dedicated to your extra costs.
If, for whatever reason, your side hustle stops making money, you should be ready to stop your discretionary spending.
9. Splurge Once
Right after you get a large raise, it is ok to spend a portion of your first paycheck on whatever you want. This may sound like it doesn’t make sense when avoiding lifestyle creep but it helps to avoid impulse spending.
The true cause of lifestyle inflation are the recurring and impulsive costs that add up over time. A reasonable, one-time expense is unlikely to severely impact your budget. Spending an extra couple of dollars every week on more expensive stuff will contribute to lifestyle creep.
When you get a pay bump, celebrate modestly right after and then get back to your normal saving. A few small, infrequent splurges can help you stay focused on your overall goals while still enjoying your current situation.
Bottom Line
If you don’t watch out, it is very easy for your expenses to increase every year as you make more money. It is tempting to add new expenses and upgrade your lifestyle just because you can afford it.
Lifestyle creep poses a very real threat to anyone looking to build wealth quickly. Instead of spending more money as you earn more, use it to save and invest in your net worth. Keep your expenses flat over time and your savings will naturally increase.
Since avoiding lifestyle inflation is not easy, use these tips to be more successful. This starts by creating a budget, understanding where there could be creep, and planning ahead for large expenses.
Take control of your lifestyle creep today and it will pay off for years to come.
