When you start making more money through your business, job, or investments, the next thing that typically happens is you start spending money more freely because you can finally afford to do so.
Unfortunately, our desire to disregard our budgetary restrictions comes a serious downside. We won’t make much progress in our financial goals if we’re too busy spending money and living at our means.
If you suspect you’re experiencing “lifestyle creep”, which is when you start earning more money and your expenses seem to grow alongside your income, then you’re not alone. It’s completely normal to feel envious of others when you’re living on a tight budget and want to buy more possessions, dine out more often, and go on vacations.
But you can’t let lifestyle creep take over your budget! It’s such a gradual, almost unnoticeable process that you may have been experiencing lifestyle creep for years without even realizing it.
4 Strategies to Avoid Lifestyle Creep
Regularly Monitor Your Budget
Lifestyle creep can infiltrate your budget in very subtle ways. For instance, a wine lover might spend $5-10 per bottle when they’re in an entry-level job, then gradually spend an average of $15, $25, or $40 per bottle as they earn more money. Others might purchase a newer car with higher monthly payments, using the justification, “I can afford this now, so why not?”
The problem isn’t about affordability, it’s about restraining your spending habits. If you go from making $50,000 per year to $58,000 per year, then why not set that money aside in an emergency savings fund or put it into a retirement account?
Just because you have a few extra thousand dollars per year doesn’t mean you should feel free to spend that money in any way you’d like. Instead, monitor your budget to ensure you’re not going overboard and prioritize savings over accumulating more material possessions as much as possible.
Pay Off Debt More Quickly
If you still have debt to your name, then paying off loans and credit card balances should be one of your biggest priorities. High-interest debt can be crippling for a long-term financial stability plan, so it’s in your best interest to pay off your debts as quickly as possible.
All too often, people assume that making the minimum payments on their loans and credit cards is enough. While there’s nothing wrong with making on-time payments consistently, you could be missing out on a huge savings opportunity if you’re not using your extra income to lower your debt burden.
Divert More Money Into Savings
It can be seriously tempting to spend as much money as you make when you have no other debt obligations holding you back, but a much better approach would be to divert more money into savings.
You have many options available, such as regular bank savings accounts, CDs, retirement funds, health savings accounts, or even investment accounts. Diverting your new discretionary income into investments like rental properties, robo-advisor accounts, or peer-to-peer lending platforms like Lending Club is an excellent way to make your money work for you and avoid lifestyle creep by setting up monthly, automatic contributions to these accounts.
Keep Your End Goal in Mind
One of the biggest financial mistakes people make in their 30s and 40s is spending their pay raises and annual bonuses on short-lived experiences like nice dinners and luxury vacations or cars. Maybe you’re making enough to finally afford the car of your dreams, but should you get rid of your current car if it’s paid off and fully functional?
Unless you’re maxing out an IRA and 401(k) each year, your number one priority should be maximizing your retirement savings as early as possible. This isn’t to say you should embrace a stingy lifestyle until you retire, but rather you should balance your discretionary expenses with retirement savings.
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By keeping your end goal in mind as your income increases, you’ll be in a much better position to retire comfortably at an earlier age than someone who spends as much money as they earn until they realize in their 50s or 60s that they should’ve started saving years ago and it’s too late now.
Don’t Let Lifestyle Creep Catch Up to You
Lifestyle creep can happen to anyone who experiences an increase in income over time without carefully monitoring their spending habits and adjusting their savings strategies to align with their new income levels.
However, the saying that “money can’t buy happiness” is somewhat true in this case. You might not be too happy if you spend as much money as you earn for several years then look back and realize how much money you could have had if you’d put more into investments or savings accounts.
While there’s nothing wrong with reasonable rewards for your hard work, the best strategy for managing and even eliminating lifestyle creep is prioritizing savings above all else. Your future self will thank you for this not-so-fun but incredibly responsible move you make today.