Lifestyle Creep
/Lately, I’ve been reading headlines indicating more and more Americans who make a 6-figure income ($100,000+ annually) are living paycheck to paycheck. While inflation likely has something to do with that, it’s possible that lifestyle creep (also known as lifestyle inflation) has something to do with it as well. Lifestyle creep is like being on a cash flow hamster wheel. As your income goes up, your discretionary spending goes up. Then, you need your income to increase so it can keep up with your spending. When the income rises again, so does spending, and the pattern just keeps repeating itself. This pattern becomes a problem when a person’s increased lifestyle spending outpaces their actual increases in income.
It is simpler than ever for this type of increased lifestyle spending to happen with the ease of online shopping, food delivery services, subscription services, and constant advertisements we are all exposed to on a daily basis. While it’s definitely okay to treat yourself from time to time and enjoy your hard-earned money, remember that as your income increases, so should your savings rate. If you spend everything you make, then run into an unplanned emergency, you could wind up taking on debt to pay for it. Here are three tips to keep yourself on track:
1) Stick to your budget – If you know you’re going to be receiving a raise, then adjust your budget to account for those extra dollars. Try to pay yourself first to ensure you’re saving adequately for emergency reserves and/or investing toward retirement. Then, allocate money toward other things. Most advisors will tell you an adequate emergency fund should equal at least three to six months of basic expenses. If you have a debt that needs to be paid off, using your increased income to pay it off faster should generally also be a line item in your adjusted budget.
2) Make a bucket list of wants – Use an Amazon Wish List or keep a running note in your phone of things that would be nice to have, restaurants you would like to try, or experiences you think would be fun. After you’ve adjusted your budget to increase your savings, then treat yourself to something on the list that falls within your means. If one of the items is a bigger goal, say perhaps a trip to a foreign country, then start a special savings account toward that goal and keep adding to it each time you get paid. With this method, you’ll always have something fun to look forward to.
3) Think about the future – If you are spending on something you want right now, you could be saving or investing less toward your long-term plans. Most of us want to retire eventually, and it’s the early savings and long-term compounding returns that help us get there. So, next time you’re getting ready to splurge, be sure you’re already saving and investing adequately or consider the opportunity cost if you’re not.
- Margaret Gooley, CFP®, CDFA®, Worley Erhart-Graves Financial Advisors
