Raleigh NC Financial Advisor: Lifestyle Creep

In the world of personal finance, it’s the subtle, sneaking changes in spending habits that may be most chilling. The phenomenon is known as lifestyle creep, and it’s one of the biggest — and most overlooked — barriers to building long-term wealth. However, once you know what to look for, there are strategies for keeping lifestyle creep far, far away.

What is Lifestyle Creep?

As income rises throughout your career, often expenses will, too. More disposable income might mean signing up for another streaming service or eating out more frequently. Or it could mean buying a second home or a new car. This is when lifestyle creep can set in.

It’s only natural to increase your spending as your income rises. After all, we work hard to buy and do the things we love in life. It’s when that higher spending happens mindlessly, rather than intentionally, that it becomes problematic. Lifestyle creep can happen to anyone, no matter their income.

Lifestyle Creep and Near-Retirees

Lifestyle creep can be particularly problematic for individuals approaching retirement. Such individuals, at five to 10 years before retirement, are typically in their peak earning years and have already paid off their longstanding recurring expenses, such as a mortgage or child-related costs. Feeling flush with their newfound surplus of discretionary income, they may opt for more expensive cars, pricier vacations, a second home, or a newfound affinity for luxury goods.

Since the goal in retirement is to maintain the lifestyle one has become accustomed to in the years preceding retirement, these retirees require more funds to support their more lavish lifestyles. Unfortunately, they lack the resources to do this because they have spent their surplus cash flow rather than saved it to bolster a more comfortable retirement.

Lifestyle Creep and Younger Savers

Lifestyle creep can also be felt by younger consumers and retirement savers, such as when they land their first well-paying job. Spending habits can quickly change to include items that were previously considered luxuries. Such behavior can make it difficult to save for buying a first home, retirement, or quickly pay down educational debt. Individuals who fear falling into such a spending trap should consider writing down their life and money goals and using them as a guide to spending decisions.

How to prevent lifestyle creep

There are several ways to keep lifestyle creep at bay. The first line of defense is not overspending on housing, often someone’s highest expense. Generally, you should keep housing costs below 25% of your net income. And, if the amount your saving falls below 20% of your net income, that could be lifestyle creep crawling in.

Create a goal based budget

As with any financial plan, it’s important to establish a plan to set yourself up for success. Establishing a goals-based budget allows you to accomplish your largest financial aspirations. Many times, these are large ticket items such as buying a house or paying off your wedding expenses. Redirecting your raised income toward what truly matters to you can help your real dreams become a reality.

As your income grows, allocate additional budget in the categories that matter to you most. You can then make a decision whether you want to increase your budget for non-essentials, too. If you find yourself in situations where it’s hard for you to stick to a budget, you may have to revisit your budgeting strategy. 

Surround Yourself with Like-Minded People

Sometimes many of the decisions we make financially are not made with ourselves in mind, but rather for the people in our lives. For example, your circle of friends might want to make weekly happy hour plans at a swanky restaurant, even though you know it’ll be an expensive event, you may feel inclined to join in as a way to be included.

It’s important that you make decisions that serve your needs. In doing so, you’ll surround yourself with people who are supportive and won’t encourage you to fall into lifestyle creep. A great friend wants to see you accomplish your financial goals and won’t judge you for skipping out on what you know will become an expensive night out. 

Avoid Scrutinizing Social Media

Although closely related to our previous tip, it can be even more impactful to avoid being swayed by any of the people who are not in your life, but are present in your social feeds. These are usually celebrities and influencers who portray their life with grandeur and excitement. 

Keep in mind that like advertisements, all the images you see are carefully curated, sometimes sponsored, and are specifically created to sell a certain image. Avoid following accounts that encourage you to spend toward a skewed portrayal of success.

Visualize Your Goals

With the power of visualization, you can begin seeing yourself achieving the goals you had in mind. A way to do this is by creating a vision board. Vision boards are a powerful tool to help you remember what matters to you most.

If the crafty work isn’t your strength, you can also set up a digital board on Pinterest with healthy images of financial success and depictions of what might be the most important in your life. When you have a desire to spend on something you know is unnecessary, you can refer back to your board and decide whether you want to go through with the purchase. 

Treat Yourself, Strategically

With a budget set in stone, it’s much easier for you to see how much you are putting toward your real financial goals. If you do want to treat yourself after a hard-earned raise — you worked hard to earn it, after all — you can set aside money every month into a special “me” fund. This becomes a separate budget from your necessities and there’s no guilt about spending on what you want, because it was a deliberate action. 

You can decide how much to allocate as long as it’s a small portion of what’s remaining after you budgeted for your necessities and goals. Many times joy can be found in the unplanned moments but ironically having a plan for those enjoyable ad-hoc expenses keeps lifestyle creep away. 

Bottom Line

By following these tips, you can keep better control over your finances and avoid lifestyle creep. Making extra money can be great, but be sure you're spending it in ways that help make your life better and support your personal goals.

Sources

https://www.fool.com/the-ascent/personal-finance/articles/6-tips-to-avoid-lifestyle-creep/

https://www.nerdwallet.com/article/investing/lifestyle-creep

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This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

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