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Whether you just landed a new full-time position or recently got a raise, making more money will almost certainly mean more spending. Maybe it means now's the time to order a better entrée, buy those shoes you've had your eye on and sign up for a gym membership that comes with a trainer: You've earned it.
If you're not careful, however, you may wake up one day and realize you now use 18 separate skin care products. You own a really nice car—and a second car. You live in an apartment you can't afford. You have five different and equally essential sets of headphones. You've fallen prey to lifestyle creep. Read on to learn more about it.
What Is Lifestyle Creep?
Lifestyle creep happens when increased income leads to increased discretionary spending. Lifestyle creep can take the form of an ever-escalating taste for the finer things or a growing slate of regular expenses that sap money from your savings account. Think higher and higher rent, hobbies that consume your cash, gourmet food, new and improved electronics, pets and kids, subscriptions and memberships, splurging on entertainment—you get the idea.
The problem with lifestyle creep is that it can edge out larger financial goals such as creating emergency savings, contributing to retirement funds or putting money away for a down payment on a home. Without you realizing it, your newfound lifestyle can take priority over your financial security. Even if you're earning a generous income, you might end up living paycheck to paycheck or incur unaffordable amounts of debt. This kind of spending is heavy: If you experience any disruption in income or have an unexpected expense, you will almost certainly have trouble paying your bills.
A few common signs of lifestyle creep:
- Living the dream: Things you used to think of as aspirational or luxury spending have become necessities.
- Here today, gone tomorrow: Spending on things like streaming subscriptions, expensive haircuts or $12 espresso is done without a second thought. At the end of the month, you don't know where your money went.
- A life of its own: It's not only one-time expenses that sting, but the fact that one becomes more comfortable with increased day-to-day expenses. Your new income may have let you leave packed lunches behind, but your $22-a-day lunch habit at the restaurant close to your office costs you $154 every week. And that's just for lunch, the most in-between meal of the day.
- Can't go back: Once you become accustomed to your new lifestyle, the idea of going back to the way you lived before in order to save money seems regressive.
Fighting Against Lifestyle Creep
Lifestyle creep can feel like progress. And in fact, continuously improving your lifestyle isn't a bad thing, as long as you're also minding your financial health and working toward long-term goals. To keep discretionary spending in check, consider these strategies:
Create a monthly budget and stick to it. As your income increases, it's important to recalibrate your budget. Consider the 50/50 rule: With this guideline, at least half of any additional money you earn should go to saving, paying down debt or investing and the other half is up for grabs. That way, every boost to your income is also a leg up toward reaching your financial goals in addition to improving your lifestyle.
Set long-term goals and track your progress. Would you like the security of having six months of expenses in the bank? Have you started saving for a new car? Do you contribute to a 401(k) at work or a Roth IRA on your own? Big goals like these help you in the long run and give you another kind of success to focus on. Remember, retirement savings targets are often linked to your income, so you'll want to contribute more toward those accounts as your earnings grow.
Keep a lid on revolving debt. Runaway debt is bad for your overall financial health and it's also a sign that your lifestyle is getting away from you. When you live beyond your means and run up debt, you're not positioning yourself well to achieve long-term financial goals like creating a nest egg or paying off your home. Maintaining too much revolving debt can also hurt your credit, which in turn makes you less financially resilient and can make it harder to secure the best terms on new debt such as a mortgage or car loan.
Automate your savings and investments. Instead of relying on pure discipline to stick to your goals, setting up automatic payments to your savings and investment accounts each month can help you prevent your spending from ballooning out of control.
Be ready for retirement and other fluctuations in income. Excess discretionary spending is especially troublesome when your income drops—for example, if you lose your job, retire or decide to slow your work schedule to raise kids. Lightening your debt load and lifestyle expenses can help position you for a wider range of life options.
How to Reverse an Escalating Lifestyle
You can also reverse the effects of lifestyle creep by taking stock of your finances and making decisions about what to keep and what to jettison. Some steps to get you started:
- Audit your spending. Where does your money go week to week and month by month? Are all your purchases good ones?
- Reduce monthly outflow. Make a list of your recurring expenses, subscriptions and memberships, and weed out the ones you don't need.
- Declutter. Gathering all of your once coveted, now unwanted, items in one place can drive home the message that unchecked spending does not help you live your best life or achieve the happiness you desire.
- Sell or replace goods. If it's possible, sell clothing or other unnecessary items online. Are you driving a car that's too costly or renting a place beyond your means? Start looking for another option.
- Make active choices. Really think about how you might use your money for your own good. Pay attention.
What COVID-19 Can Teach Us About Lifestyle Creep
Recently, we all had an immersive lesson in beating back lifestyle creep. As COVID-19 raged, millions of people lost their jobs. We were forced to stay in our homes and out of restaurants, concert venues, shopping malls and airplanes. We saved more: According to the U.S. Bureau of Economic Analysis, American households had $2.29 trillion in savings in May of 2021, nearly a 66% increase from the $1.38 trillion in savings Americans had as of February 2020, before the pandemic began. Experian data also shows a reduction in average credit balances as well as record high credit scores during the pandemic. As our ability to spend indiscriminately waned, our ability to save money and build our credit improved.
It was a hard lesson that no one wants to go back and learn again. But if we can move forward with the knowledge that very little spending is indispensable, that money in the bank is as good as—well, money in the bank, and that we have flexibility and choice as we get back to normal, then maybe we can show some real progress. In the end, it's our lives, not our lifestyles, that have value.