What I Wish I Learned in School 6 of 12: Avoiding Lifestyle Creep
Most people assume that, if their income were to increase, they’d start saving and investing a lot more money than they are now. However, what actually happens after they get that raise is that (more often than not) their savings barely change and they can’t figure out where the extra money is going. This is usually due to lifestyle creep. Let’s take a look at this common phenomenon, why it happens and how you can avoid it for better maintaining a life of financial fitness.
What is lifestyle creep?
Lifestyle creep, also known as lifestyle inflation, is when people’s monthly expenses increase along with their income. Unchecked lifestyle creep can ruin long-term financial goals, leaving people in a cycle where higher earnings don’t translate to increased savings or financial security.
Recognizing the signs
Lifestyle creep happens slowly, and it can be hard to recognize. Here are some signs that you may be caught in lifestyle creep:
Stagnant savings. Despite earning more, your savings or investment accounts aren’t growing.
Increased debt. You’re consistently taking on more debt to finance a more lavish lifestyle.
Frequent upgrades. You’re constantly trading up on items that are still fully functional, such as electronics, cars or appliances.
Tight budget. You’re always running low on money by the end of the month despite a recent increase in income.
Subscription overload. You’ve accumulated multiple subscription services you aren’t using.
Strategies to avoid lifestyle creep
One of the best ways to prevent getting stuck in lifestyle creep is to take responsible steps when your income increases. Follow these tips to stay financially fit under any circumstance:
Establish clear financial goals. Whether it’s saving for a home, retirement or an emergency fund, having clear long- and short-term goals can guide spending decisions and help you prioritize saving over unnecessary expenditures.
Create and stick to a budget. Develop a detailed monthly budget that allocates funds for essentials, savings and discretionary spending. Review and adjust your budget on a regular basis to ensure your spending always aligns with your financial goals and prevents mindless overspending.
Limit your revolving credit. Maintaining a high credit card limit can hurt your credit score and make overspending too easy. It’s best to keep your limit down, even with an increase in income.
Automate savings and investments. Set up automatic transfers to savings or investment accounts each time you receive a paycheck. This “pay yourself first” approach will ensure that a portion of your income is secured before you do any discretionary spending.
Mindful spending. Overspending can often be linked to mindlessness. To avoid buyer’s remorse and to spend less, implement a waiting period for significant purchases, such as a 48-hour rule. Take that time to evaluate if the expense is necessary or impulsive. This will help you determine whether you actually want to buy a specific item and believe it’s worth the price.
Regular financial audits. It’s a good idea to review your financial statements on a regular basis to identify areas where spending may have unnecessarily increased. Assess recurring expenses, such as subscriptions or memberships, and eliminate those that no longer provide value.
Resist social pressures. Social media and peer influences can create a sense of urgency to match others’ spending habits. If you spend a lot of time on social platforms, it’s important to remember that what you see is likely not the real or complete picture of the poster’s life. Anyone can lie about how perfect their life is, and with advanced AI technology, it’s easier than ever to fabricate or touch up photos and videos to back up their story. Instead of trying to match or outdo online personalities, create your own personal and financial goals, a realistic plan for achieving them and then go get ‘em!
Live below your means. Even with a higher income, it’s best to maintain the number one rule of money management, which is to spend less than you earn. While it’s tempting to upgrade your lifestyle when you can afford it, consider the long-term benefits of financial security over short-term gratification. For example, you can continue to live like a student or resident even after securing a well-paying job and save the extra money for a down payment on a house.
Lifestyle creep is fairly common, but you don’t have to become another statistic. Use these tips for active steps you can take to prevent and avoid lifestyle inflation.