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
If you think lifestyle creep might be getting out of control for you, then here are a few things to keep in mind to refocus your frugal lifestyle.
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.
Balance Spending and Saving
When you’re no longer living paycheck-to-paycheck, more and more non-discretionary expenses somehow sneak their way your budget. You might start going to nicer restaurants, upgrade your entertainment center and TV channel selections, remodel parts of your home, and buy fancier clothes to make your lifestyle match your income. This is the mentality that leads
This mentality that leads lottery winners to declare bankruptcy, however. It’s too easy to spend money on whatever you’d like when scarcity is no longer a concern, but this will only put you on the fast track to financial ruin. Instead, try to balance your spending and saving habits.
For instance, if you allocate $1,000 per month for dining out and entertainment, then set aside $1,000 for investments, retirement savings, or additional car/mortgage payments. If you can’t match your “necessary” and “frivolous” amounts, then restructure your budget in a way that keeps spending and saving levels relatively even.
This way, you shouldn’t feel bad for splurging here and there as long as it’s within the budget. And, you also won’t have to worry about putting your financial well-being in limbo.
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.
Higher living standards lead to higher expenses. And, while that might be fine for your current situation, you should always be prepared for a time when things might not look so rosy. If you face a large unexpected bill or you lose your job (heaven forbid), you need to have an emergency savings fund to help you financially ride out the rough waves.
Shockingly, most Americans don’t even have $1,000 in the bank. So what happens if an emergency arises? They usually have to borrow money or pay with their credit cards. Rather than risking a mini-panic in the case of a financial emergency, you should always have at least three months’ worth of expenses socked away in a savings account or readily available for liquidation in an investment account.
This is particularly important as your income rises because some people fall into the trap of thinking their current savings is “enough” without accounting for all the new expenses they’ve been adding to their budgets.
Lifestyle creep isn’t a problem for everyone, but keeping it in check can be a struggle sometimes. Nobody except maybe Donald Trump is totally secure in their finances, so never assume you’re “set” once you get that pay raise you’ve been hoping for or an unexpected holiday bonus. Keep lifestyle creep at bay by continuing to prioritize frugality and spending within your means, allowing for some fun here and there while also cushioning your savings and investments.
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.
Set Realistic Expectations
When you get a pay raise or a bonus at work, it’s tremendously tempting to splurge it all on a “little” something special for yourself. After all, you worked hard for that pay raise, and if it’s unexpected money, then it’s easier to justify spending it on something outside of your typical budget.
While celebrating this occasion certainly warrants a nice dinner or small new purchase, it’s important to remain realistic about your financial situation, too. Sure, you might be able to afford the payments on a new BMW after that promotion you just got.
But, if you just bought your current car a year or two ago, it’s better to put the money aside to get maximum value out of your vehicle. It will help you to avoid making big purchases for things you don’t need yet.
Putting a huge chunk of your bonus towards an outstanding loan or credit card debt may seem like a drag, but it’ll put you ahead financially and save you money over the long run on interest payments.
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.
Lifestyle creep happens to a lot of people, particularly in their late 20s and early 30s. It happens because you’re no longer a broke college student, you’re almost done paying off your student loans, and you’re progressing so well in your current job that occasional pay raises become a reality. The problem with lifestyle creep is that increasing income levels tend to correlate with increased spending.
Got a holiday bonus from the boss? Why not use it as a down payment for that brand new car you’ve been eyeing for years – you can afford it now, after all!
Finally made your last payment on those student loans that were choking your discretionary income the past few years? Of course, you should sign up for that exclusive gym membership you’ve wanted, right?
Unfortunately, lifestyle creep tends to throw frugality to the wind because we mistakenly believe we can afford all the things we’ve ever wanted since our paychecks are bigger than we’ve ever seen before.
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.