I am sure we are all aware that we should be living within our means. However, does it ever feel like even though you’re making more money you still can’t get further ahead? There could be several contributors to this, one being the very high inflation we are currently experiencing. Another potential cause is what is referred to as Lifestyle Creep.
Lifestyle creep is also referred to as lifestyle inflation. It occurs when an individual’s standards of living improve as their discretionary income rises. Their former luxuries are now their new necessities. In short, as you make more money, you spend more money.
This causes you to never get ahead financially. If precautions are not taken early on, bad habits are set and it can cause you to live paycheque-to-paycheque no matter how high your income is. I’m sure we can all think of someone who earns the same or more money than you but somehow, they also seem strapped for cash or complain about not having money. Maybe that person is you.
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The Mental Side to Lifestyle Creep
A large portion of lifestyle creep problems stems from the mental side. It starts with small compromises in your budget. If not dealt with, it quickly leads to bigger purchases giving way to the ever-dangerous slippery slope.
As we start to earn more money as we develop in our careers, it is easy to want to treat ourselves. There is nothing inherently wrong with it but it can cause bad habits if it goes unchecked. It can soon lead to a game of “keeping up with the Jones’s”. Now that you are earning more, maybe you can afford to buy that morning coffee, or go out for lunch on Fridays. However, you don’t need to compare yourself to your neighbors or colleagues.
Just because Jim at the office goes out for lunch every day, doesn’t mean you need to. Just because Bill down the street upgraded his car and put it in a hot tub doesn’t mean you need to. Compare yourself to who you were and where you were yesterday, not to someone else today.
When you start making more money it is ok to spend some of that money on lifestyle needs. However, you need to be sure your savings rate also increases proportionally.
Let’s say at 25, you’re making $50,000 a year and saving 10% of that ($5,000). Now you have a plan in place that says, if your spending stays the same from now until your eventual death, $5,000 of annual savings should be sufficient.
Every year you get a 5% raise, but rather than increasing your savings rate you decide to spend it all. Fast forward to age 60. Now you’re making $140,000 a year and starting to plan for retirement. You have been diligent in putting away that $5,000 every year, and spending everything else on top of that. You have become accustomed to a lifestyle nearly triple that of when you were 25.
Oh, shoot. Your lifestyle has become a lot more expensive. You don’t really want to delay retirement and you also don’t want to sacrifice your lifestyle. However, now you realize that your retirement income won’t be sufficient because your plan was based on much lower lifestyle expenses.
As we continue to earn more it is easy to justify spending more. However, when we get accustomed to spending more, and those habits go unchecked, it can be very hard to reign that spending back in. We have to be sure that when our spending increases, our savings increase proportionally by an equal or greater amount.
Combating Lifestyle Creep
So we know what lifestyle creep is, and it is something we should try to avoid. But how do we combat lifestyle creep? Below are some actionable steps you can take.
Have a budget
A budget is a great tool, that is often underutilized. You would be amazed at how many people underestimate how much they spend monthly, and overestimate how much they could potentially be putting away each month.
A budget doesn’t need to be super detailed with 50 different categories of spending. But at a minimum, it should track how much income comes in and how much is being spent each month, and on what. It may help you realize that you are spending a lot more on entertainment than you thought. Or more on eating out than you thought, or another area where you maybe need to cut back.
Within your budget, you should also identify how much of your income should be directed towards savings. If it helps, think of your monthly savings as a non-negotiable fixed expense.
When your income increases, a portion of that increase should go towards your savings. One such rule is the 50/50 rule. This means that 50% of any income increase goes towards saving the other 50% is up for grabs. So, if you were making $50,000 and saving $5,000, but now you’re making $75,000, 50% of the $25,000 should go towards savings. It is a great way to increase your overall savings rate as income increases over time and ensure that you don’t succumb to lifestyle creep.
Another thing to be mindful of within your budget is your base monthly expenses. What is the lowest amount you could cut your monthly expenses to? What are your base monthly carrying costs?
This would be rent/mortgage, insurance, food, gas, internet/utilities, and maybe a couple other things. You never know what may come up and what may need to be cut out of your budget. If the time comes and you need to cut expenses as much as possible, it is good to know what are the first things you cut out.
Automate Savings
Above we mentioned that you could think of your monthly savings and a non-negotiable fixed expense. One way to help do this is to have your monthly savings automatically withdrawn from your account. The set it and forget it, model.
If we manually have to move money around each month to ensure we are saving, the temptation is there to justify not putting the money away. You might say to yourself “I really should put this into my savings, but I really need to buy _______. I’ll just skip the savings this month and do it next month.” That is a slippery slope, my friends.
Set Goals
A great way to stay motivated is to set goals, both long and short-term. Your goals could come in a variety of forms. Maybe it’s that you want to save a minimum of “x” per month every month. Or that you want to reach a certain level of investable assets by a certain point. Whatever your goals are stick to them and reflect back on them frequently.
A great motivator in addition to goals is to have rewards when those goals are achieved. For every short-term goal, you complete you get a small reward. But be honest with yourself, don’t treat yourself to that reward unless you actually earned it.
Also, make sure you know how your brain works. If you don’t accomplish a goal are you going to get discouraged and give up? Or are you the type of person who sees that as a challenge and will try even harder to get back on track and meet the next goal? Some people work better with very attainable goals to keep them motivated. Others like more challenging goals.
Conclusion
No matter where you find yourself in your financial life, it is never too late to get things on the right path. Make sure you are spending within your means. To do that utilize a budget. Make sure that your automated monthly savings are accounted for in your budget and non-negotiable fixed expenses. Lastly set goals for yourself, and reflect on them frequently. It is easy to forget the progress we have made if we don’t reflect on where we started and what we set out to do.
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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy
