Lifestyle creep occurs when increased income leads to increased spending. Despite earning more money you don’t see an increase in wealth because you keep spending what you have.
You might be experiencing lifestyle creep if despite getting a raise, or several, you still find yourself living paycheck to paycheck.
How does lifestyle creep affect your budget?
Your budget is affected by lifestyle creep because you grow accustomed to spending more money on certain things and can find it difficult to set limits or reassign your money to other goals like savings, retirement and investment. You may justify expensive purchases that don’t fit into your budget because of your perception that you can afford it or deserve it.
Tips To Avoid Lifestyle Creep From Affecting Your Finances
Increases in your income or windfalls shouldn’t be viewed as immediate spending opportunities. Instead, approach it as a chance to save and invest. Over time, the money you invest will earn you future wealth.
After getting a raise or access to a large sum of money it can be tempting to make upgrades to your lifestyle right away. But it’s best to be patient and cautious. It’s ok to increase your spending some, but only after you’ve allocated funds to paying off debt, saving for retirement, and working toward investment goals.
5 Tips to Stop Lifestyle Creep
- Windfalls Are Saving and Investing Opportunities, Not Spending Ones!
- Pay Your Savings First
- Wait At Least A Year Before Upgrading Your Lifestyle After A Raise
- Upgrade Your Emergency Fund Before a Big Lifestyle Change
- Don’t Forget About Inflation!
1. Windfalls Are Saving and Investing Opportunities, Not Spending Ones!
While getting a raise, bonus or other large sums of money is exciting, try to focus on the long-term opportunities rather than the short-term rewards. If the majority of your debts are paid off, consider investing the money so it can grow over time.
Investments with compound interest passively grow your money and can be a great way to prepare for retirement, build college funds, or save a downpayment.
2. Pay Your Savings First
Before you increase your discretionary spending budget, pay your savings first! Automate your monthly savings for a higher amount and acclimate to that budgeting change before giving yourself more freedom to spend on other things.
3. Wait At Least A Year Before Upgrading Your Lifestyle After A Raise
Try waiting a year or more after a pay increase to make big lifestyle upgrades like a new home, car, travel, or other commitment. The extra time gives you a chance to increase your emergency fund and to save money to make those spending increases less risky.
Extra time also helps you sort out your priorities and avoid impulsive decisions about how to handle your money.
4. Upgrade Your Emergency Fund Before a Big Lifestyle Change
An emergency fund usually includes three to six months’ worth of living expenses. So, before you permanently increase those monthly bills with lifestyle upgrades, make sure your emergency fund is up to speed.
Having an Emergency Fund in place protects you from the unexpected. Sudden job loss, illness, or other emergencies can disrupt your finances. With an emergency fund in place, you ensure that your basic needs are met while you navigate stressful times.
5. Don’t Forget About Inflation!
Inflation causes the costs of goods and services to increase every year and rates just hit an all time high. While inflation rates stayed well under 3% for the past decade, in 2021 they hit a staggering 6.8%!
That means unless you get a 6.8% raise this year, you are taking a pay cut! So even when you get a raise, unless it’s higher than the inflation rate, spending more could actually do damage to your budget.
It’s Ok to Spend More if You Plan Ahead
If you aren’t careful lifestyle creep can leave you with more bills than you can afford and debt that you can’t pay off. Despite making good money many find themselves living paycheck to paycheck and lifestyle creep is often to blame. While you should enjoy the money you earn, the stress of lifestyle creep often offsets the joy of spending money on unsustainable lifestyle upgrades.