If an increase in your income results in an increase in your spending, you’re subject to lifestyle inflation or lifestyle “creep.” It tends to become greater every time you get a raise or higher paying job. On the surface, why should lifestyle creep be any cause for concern? After all, if you’re earning more, doesn’t that mean you have the means to spend more?
Not exactly, for these three reasons:
• It can make it more difficult to get out of debt.
• It can slow your progress to your retirement savings or other big-picture goals.
• It can relegate you to a cycle of living paycheck-to-paycheck — and make you feel like you’re running in place.
In this article, we’ll show how lifestyle inflation can be hazardous to your wealth and present some practical strategies to avoid that feeling of “never getting out from under it.”
WHEN WE MAKE “REAL MONEY,” WE FALSELY EQUATE CONSUMPTION WITH HAPPINESS
Lifestyle creep can occur during any life stage and anytime you get a significant job promotion or raise. You start to see you colleagues or neighbors buy bigger houses, nicer cars or go on beautiful vacation. FOMO (fear of missing out) sets in. This may cause you to ramp up spending and then make minimum payments on your credit cards — under the assumption that the new goods and services that you buy now will make you happier. Many scientific studies and ancient wisdom confirm that people’s well-being actually improves as they place relatively less importance on materialistic goals and values; whereas orienting relatively more toward materialistic goals is associated with decreases in well-being over time. Part of this may be because the things we own require time, energy and focus — to clean them, organize them, manage and maintain them — and thus distract us from the things that really bring us lasting happiness.
FOUR STRATEGIES FOR AVOIDING LIFESTYLE INFLATION
Before we’re labeled grumpy killjoys, we should acknowledge that improving your lifestyle isn’t necessarily a bad thing. You can still have fun today while saving for tomorrow. But you have to be mindful of your financial health and work toward long-term goals. To keep your discretionary spending in check, consider these four strategies:
1. Calculate the effect of additional income on your budget. When estimating your future retirement income needs, you’ll probably want to maintain or slightly improve your current standard of living. But lifestyle creep, even if slow, has long-term implications. As your living expenses increase, your current savings rate must also rise to accommodate additional income needs in retirement. You should calculate the real change to your budget as a result of a raise or higher-paying job offer, consciously establish spending and saving amounts, and automate your savings, either through your bank or workplace retirement plan. A good rule of thumb is that the percent you decide to save should remain consistent with your pay increases. For example, if you decide to save 10% of your annual income of $70,000, your saving equates to $7,000 each year. If you get a raise increasing your income to $75,000, your savings should increase to $7,500.
2. Don’t make snap decisions. We know we can sound like a broken record, but you need to balance short-term wants versus long-term needs as you weigh the pros and cons of adding new expenses. Think before spending on impulse buys. One approach is to visualize what your bank or credit statement will look like at the end of the month if you buy that fancy espresso machine. If you’re a born shopaholic and you find yourself in a store, leave (if you’re browsing online tempted by one-click purchasing, close the tab). Skip those “impromptu” dinners with well-heeled friends, where even splitting the check makes you hyperventilate. Finally, do a monthly audit of those streaming subscriptions you sign up for to see that one movie — you may find you’re not getting as much value out of them as you think.
3. Value financial independence and experiences over material things. Getting out from debt and becoming financially independent at a young age can set you up for greater flexibility down the road. Young savers have the most to gain from investing extra money at an early age. It can allow them to take a dream job over a higher paying one, consider early retirement, or think about making a career change without stressing over money. Taking a vacation or educational class can be more rewarding and give you more lasting satisfaction than buying a closet full of new shoes or clothes. (Just be sure to budget that vacation first before you get in vacation mode, and pay for it in cash — don’t put it on a credit card unless you know you can pay it off at the end of the month.)
4. Make saving and investing a habit. Rather than spending your extra income, make it a priority to save and invest. When you get a raise, put all or most of it in a savings account, or add to your 401(k), Roth IRA or taxable brokerage account (especially if you’ve maxxed out your 401(k) contribution.) But before you set aside any money to fund long-term financial goals, be sure to pay down high-interest debt, such as personal loans or credit cards. This could be a stress-reducer if you happen to experience an unexpected job loss.
Don’t let lifestyle creep control the state of your finances. Your financial health depends on being able to defer gratification and work toward long-term goals. The old saving is true: “Live a little, but not too much.”
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at firstname.lastname@example.org. Securities offered through LPL Financial, member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment advisor. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.