Like many Americans, you may have gone through a period of time when your income increased but you still didn’t manage to get ahead financially. You may have even started to wonder if you were doing something wrong.
Well, you’re not alone. This phenomenon is known as “lifestyle creep.” And while it can be difficult to avoid, there are ways to keep it from happening so you can improve your financial situation.
So what is lifestyle creep and how can you combat it? Let’s take a closer look.
What Is Lifestyle Creep?
Lifestyle creep (sometimes called “lifestyle inflation”) is the gradual increase in your spending that occurs as your income grows. It’s often subtle and happens slowly over time. You may not even realize it’s happening until you find yourself in a difficult financial situation.
For example, let’s say you start out making $50,000 per year. You live relatively modestly, driving an older car and living in a small apartment. As your career progresses, you get raises and begin making more money. But instead of saving that extra money, you start to spend it.
By the time you’re making $70,000, you drive a nicer car and upgrade to a bigger apartment or house. You start going out to eat more often and take more vacations. Before you know it, your expenses have increased right along with your income and you’re financially no better off than you were several years ago when your salary was $20,000 lower.
Summed up, lifestyle creep is increased spending that goes along with increasing income.
This can be a very dangerous trap to fall into. If you’re not careful, lifestyle creep and bad spending habits can leave you with little to no savings and a lot of debt.
Why Is Lifestyle Creep Harmful?
Lifestyle creep is problematic for several reasons. First, it can prevent you from saving money. When you’re living paycheck to paycheck, it’s difficult to put any money away for the future. Instead of thinking about saving for the future, you’re thinking about the fun things you can afford now that you’re making more money.
You may also find yourself in debt if you’re not careful. Credit cards and loans can be easy to get when your income is high. But if you don’t have the ability to pay off that debt, it can quickly become overwhelming.
Many purchases require an ongoing commitment, not just a one-time expense. You may be able to afford a bigger house now that you’re making more money, but have you considered the higher ongoing expenses like utilities, insurance, added repairs, landscaping, and maintenance?
Another problem with lifestyle creep is that it becomes difficult to adjust to a change in income. If you suddenly find yourself unemployed or underemployed, you may have a hard time making ends meet because it’s very hard to go back to your old level of spending. This can lead to financial problems and even ruin your credit score.
Isn’t Lifestyle Creep Normal?
You may be thinking, “Isn’t it normal to spend more as you make more money?” And while there’s nothing wrong with modest lifestyle upgrades as your income grows, it becomes a problem when your discretionary spending outpaces your income growth, or even stays the same as your income growth.
For example, it’s normal to live in a bigger house in a nicer neighborhood in your 40s and 50s than you did when you were 25. As your career progresses and you make more money, sure, it’s perfectly normal that you spend a little more as well. But, you don’t want to be in a situation where you’re not saving any more money because you’re spending it all.
It’s also important to keep in mind that lifestyle creep is often subtle. It happens slowly over time and can be hard to spot. That’s why it’s important to be aware of the warning signs and take steps to avoid it.
The Warning Signs of Lifestyle Creep
There are several warning signs that you may be experiencing lifestyle creep or lifestyle inflation. If any of these sound familiar, it’s time to take a close look at your finances and make some changes.
- Spending more than you make: If you find yourself regularly spending more money than you make, that’s a red flag. You should also be concerned if you’re using credit cards to pay for basic living expenses or if you’re taking out loans to finance your lifestyle.
- Living paycheck to paycheck: If you’re never able to save any money because you’re always spending everything you make, that’s another sign that lifestyle creep has taken over.
- Not having any savings: Everyone should have an emergency fund to cover unexpected expenses. If you don’t have one, or if you have to dip into it regularly to pay for everyday expenses, that’s a sign that your lifestyle is too expensive.
- Increasing debt: As we mentioned before, debt is often a part of lifestyle creep. If you’re taking on more debt to finance your lifestyle, that’s a warning sign that you’re spending too much.
- Trouble adjusting to changes in income: If a change in income (like a job loss) would mean not being able to meet your financial obligations, that’s a problem. It means your lifestyle is too expensive and you need to make some changes.
- Constant financial stress: If you’re always worried about money and your financial future, that’s a sign that you need to make some changes.
How to Avoid Lifestyle Creep
Now that you know what lifestyle creep is and why it’s harmful, let’s look at some tips for avoiding it.
Determine Your Financial Goals
The first step is to figure out what your financial goals are. Do you want to retire early? Save for a down payment on a house? Build up your emergency fund? Once you know what you’re saving for, it will be easier to resist the temptation to spend that money on something else.
After you’ve set your financial goals, check your progress once a month. You can use Empower to have a financial dashboard that shows all of your accounts in one place and allows you to run several reports.
Many people who experience financial struggles haven’t taken the time to set goals. Without goals, you really have no specific direction with your finances. And when you have no direction, it’s impossible to manage your money effectively.
Track Your Expenses and Create a Budget
You can’t make changes if you don’t know where your money is going. For at least a month, track every penny you spend. Tracking your expenses will help you identify areas where you’re spending too much.
You can use an app, a spreadsheet, or even write it down on paper. Whatever method works for you is fine, but be sure that you’re recording expenses each day so nothing is missed. And at the end of the month, check your bank and credit card statements to be sure you didn’t miss anything.
Once you know where your money is going, you can create a budget to help keep your spending in check. Make sure to include savings in your budget so you’re prepared for unexpected expenses.
Live Below Your Means
One of the best ways to avoid lifestyle creep is to make sure you’re living below your means. That means spending less than you make and putting away money for the future.
Budgeting is an important part of living below your means. You can determine how much you’ll allow yourself to spend, and how much you will save. It’s also helpful to pay yourself first. Make sure you’re putting money into savings before you pay your bills. This way, you won’t be tempted to spend it on something else.
Eliminate and Avoid Debt
If you’re already in debt, work on paying it off as quickly as possible. The faster you can get rid of it, the better.
You can also avoid future debt by being mindful of your spending. Only charge items to your credit card that you know you can pay off at the end of the month. And don’t take out loans for things that you don’t absolutely need.
Handle Pay Raises Wisely
Getting a pay raise is always exciting. But before you start spending that extra money, make sure you’re handling it wisely.
Be sure that at least a portion of that raise is going towards increased savings. Of course, saving all of the extra money is a great idea, but that’s not always practical or realistic.
Automate Your Savings
One of the best ways to make sure you’re saving money is to automate your savings. Whether you’re saving for retirement or other goals, automating savings is always helpful.
This way, you won’t even have to think about it. The money will be transferred from your checking account into your savings account each month without you having to do a thing. You can also set up automatic contributions with many investment platforms.
Avoid Comparing Yourself to Others
It’s easy to fall into the trap of comparing your lifestyle to others. But just because someone else can afford something doesn’t mean you can (or should) too.
Many people buy things they can’t afford. Just because you see someone with a nicer car or nicer home doesn’t mean they can truly afford it. Focus on doing what’s best for you and your family, not what will keep you on par with others.
Final Thoughts on Lifestyle Creep
Lifestyle creep or lifestyle inflation can be a difficult thing to avoid. But if you’re mindful of your spending and make a concerted effort to save money, you can keep it from happening, or even reverse it.
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