People love a rags-to-riches story. There is something satisfying about the entrepreneur who has found success with an innovative idea. Hearing about the brilliant mind who ascended the corporate ladder intrigues people as well. However, there is much less conversation about the stories that don’t share a happy financial ending. It is a harsh reality, but some individuals find themselves in a precarious financial situation despite an increase in income. Of course, there are a constellation of factors that can lead to adverse financial outcomes including insufficient wages amidst inflation, involuntary unemployment, structural discrimination, and the burden of medical and/or academic expenses. But there is another threat that can be much more insidious: lifestyle creep. This sneaky phenomenon, which entails spending unsustainably after earning more money, can be difficult to detect. Following the advice below can help you keep lifestyle creep at bay.
Avoid Drastic Changes in Spending
After earning a raise, it’s perfectly acceptable to celebrate your accomplishment by booking a flight to an exciting destination or treating yourself to an item that you’ve been dreaming about. However, try to limit this spontaneity to a special occasion rather than a habit. Approaching your finances with intentionality can be massively beneficial regardless of your financial situation. Lack of planning contributes to lifestyle creep. When you see more money hitting your bank account each month, it can be tempting to immediately start spending more. But that can be a slippery slope. Take inventory of where you can have more flexible in your budget, but also consider which costs should remain around the same. For example, signing a new lease with materially higher rent can leave you in a sticky situation. Should your income shift suddenly, then you would have to deal with this high fixed cost, or you would have to go through the headache of breaking your lease. It is much easier to save money by cancelling subscription services that you no longer use (which costs Americans over $3,000 per year, by the way) than it is to manoeuvre financial commitments where there is a longer-term obligation.
Set Long-Term Financial Goals
Having an end goal in mind may foster discipline in the present day. This can be helpful when it comes to managing your money as well. Whether you’re dreaming about purchasing property, setting up an emergency fund, paying off your student loans in a certain time frame, or pursuing early retirement, you can take steps today to increase the likelihood of future success. Be intentional and set aside a bit of money each month so that you can make gradual progress toward your desired outcome. This can be a fixed dollar amount or a percentage of your monthly budget. Remember, these can be baby steps – you don’t have to have a 10-year plan set in stone right now.
Prioritize Your Savings goals
Sometimes, having less money on hand is the optimal way to avoid excessive spending. Katherine Young, the founder of Yearwood Young Advisors, encourages clients to anchor their financial planning based on their savings goals. Reflecting on the importance of this framework, Katherine advises, “Work backwards. First, designate how much you want for savings. Then, raise your percentage of income dedicated to savings over time.” Your employer may also have a program to help encourage this behaviour as well. Research if your company has an option to reserve a certain amount of your paycheck for your retirement funds. In addition, certain firms may match their employees’ 401 (k) contributions. Do yourself a favor and see if you are eligible for such options.
Avoid comparison and Peer Pressure
Comparison is hard to avoid in this era of social media. This is an unfortunate reality, as it can be detrimental to your mental health. According to a 2018 study from the Pew Research Center, 24% of young people mentioned that social media has negatively materially impacted them. But these feelings apply to adults as well. Lifestyle creep can stem from a sense of deep-seated insecurity as you consume images of other people leading glamorous lives. One of your coworkers just returned from a lavish vacation overseas, which could make you feel compelled to book a similar trip. A former classmate put a down payment on a house – should you do the same? Driving on the highway and passing a high-end sports car could have you re-evaluating your vehicle. But these comparisons do more harm than good. Try to remind yourself that you are on your path, and you do not need to have the same lifestyle as people around you.
Opting for ride shares over public transportation, treating yourself more and more to meals at expensive restaurants, constantly indulging in luxurious vacations that break the bank, and frequently upgrading your technology seem like fairly innocent choices. But over time, these add up. You can live a happy and fulfilling life without lifestyle creep being part of your story. As a hard-working BAUCE, you should treat yourself every once in a while. At the same time, you owe it to yourself to keep financial planning at the forefront of your decisions.
