Lifestyle creep refers to the notion that as our income increases, so too does our spending. Effectively leaving us in the exact same financial position that we were in with our lower salary – but perhaps with a few nicer things or a bigger house to show for it.
Earning more money will not always be the solution to building wealth if spending gets out of hand.
You will be no wealthier than you were 5 years ago with a lower salary if you spend every dime you make on lifestyle expenses rather than on investing in assets.
How much you earn is important, but what is equally as important is how you choose to spend and utilize the income you are earning.
Once you get that raise at work or perhaps come into a significant amount of money one way or another, it is very exciting!
You start to play out all the things that you have been waiting to buy or wanting to buy but couldn’t yet afford – but now you can! So let’s go for it.
Hold that thought. Don’t be trapped by the concept of – I can afford it – so why not buy it.
Because as you start making more money, that reality will start to become true for more and more things but that fact may not make the purchase make sense for you.
Here are some suggestions to avoid lifestyle creep and continue to find the balance between prioritizing your lifestyle today as well as prioritizing your lifestyle for the future.
1. Continue to Budget and Be Mindful of Spending
Just because you start to earn more does not mean that there is no longer value in budgeting and keeping track of your expenses. In fact, I could argue that you need it now more than ever.
You have more cash flow coming in – meaning that you have more to work with and more to spend. And I think we can all agree – it’s not difficult to spend money.
The purpose of budgeting or tracking expenses is to ensure that your spending is aligned with your values and long term goals. That doesn’t change just because you have more money.
With more income, you now have more opportunity to make an even bigger dent in the goals you have for yourself.
Keep the budget if you have one. Keep tracking your expenses and continue to align your spending with your long term goals.
2. Automate Your Savings & Retirement Savings
Continue to allocate a certain percentage of your income to both your short term savings goals along with your retirement accounts.
Typically, there is a percentage tied to our retirement contributions – for example we contribute 5% of our income to our 401K. Luckily, when our income goes up, our retirement contributions will automatically go up as well.
Ensure that you have this process automated as a certain percentage of your income and increase where and when you can.
3. Avoid Big Lifestyle Shifts Immediately After A Raise or Promotion
When we get that big raise or promotion – it is almost an immediate reaction for us to start counting the ways we can spend the money.
We can afford the bigger house now, the nicer car, the luxury apartment in the city, etc. And perhaps we can on paper.
But what that will do is again create an environment where you are now setting yourself up to spend more at the same rate in which your income increased.
Take some time to adjust to the new cash flow coming in. Reassess savings to your retirement, paying off debt, a few treats for yourself and then evaluate if a lifestyle shift is both necessary and affordable going forward.
Run the numbers and identify the true monthly impact of the change.
4. You Don’t Have to Pay For Everything and Treat Everyone
It’s very common for individuals with the bigger salary or who just got the promotion to start dishing out funds to friends at the bar – covering tabs or paying for lunch here and there. And that’s all well and good – being generous is an incredible trait and one that should not be ignored or frowned upon.
But have this post serve as a reminder to you that just because you make more than your friends or just because you get that big raise or pay jump – does not mean that you need to sign yourself up to cover tabs and cover the expenses of the people around you.
Now, if that’s something you want to do – something that makes you feel good – and something you have budgeted for then fantastic.
But don’t start throwing your card around constantly in an effort to impress the people around you.
5. Pre-Determine Your Allocation of Funds When you Receive a Bonus
Bonuses are often talked about with you prior to you receiving them – in your annual or end of year review. In most circumstances, there is an understanding of what the amount will be or at least a range in which you can estimate.
With that said, pre-determine where you want that money to go.
Do not allow $5,000 or $10,000 or $50,000 to hit your account without a plan for those funds.
A few ideas on how you can allocate your bonuses…
You could allocate a percentage of your bonus to one or all of the below:
- Boosting your savings/Investment accounts
- Funding a vacation
- Treating yourself
- Giving back to others you care about or your community
- Paying down debt
Make a plan for the funds and use them accordingly.
By following these tips, you can build awareness around your finances and spending habits in an effort to avoid lifestyle creep. Making more money is fantastic, but make sure that you continue to align your spending with the things that add value to your life today and for your tomorrow!
Needing help tracking expenses – refer to the FinPowered Personal Wealth Tracker
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