What exactly is lifestyle creep? Lifestyle creep is the gradual increase of your spending as your income increases. Essentially, it's your lifestyle and standard of living creeping up to levels you wouldn't have been able to maintain earlier in your life. Allowing higher levels of spending can have serious negative impacts on building wealth and staying on track to meet your future needs.
Lifestyle creep shows up in many different areas and may be small or big. You know how you used to buy the store brand ice cream but now you buy Mayfield or Blue Bell ice cream? Maybe your kids used to be fine with Old Navy clothes and now they want Lululemon. Vacations to the local theme park are now replaced with trips to far off destinations. These are areas I have personal experience with in our household.
Before making these types of purchases, one needs to make sure they have a solid financial plan that has a high probability of success. Make sure you have budgeted properly for retirement, built up an emergency fund and that your money is going to what is most important to you and your family.
The danger of lifestyle creep is that it happens gradually over an extended period, making it hard for you to notice. If you want to make sure you are building wealth as your income increases read these four points to keep your financial life on the right path.
1. Money Mindfulness: This is the practice of identifying your thoughts, feelings and intentions in each moment. Money mindfulness applies this practice to your spending so you can consider the implications of your financial decisions beyond the immediate gratification. This really isn’t about doing anything differently, but simply noticing what you do and how you feel about the choices you make.
Praying about your finances has helped me calm my mind around money and seek direction on how to make better financial decisions. Ask the Lord for direction and guidance. Listen to the thoughtful voice of the Holy Spirit and allow the Lord to work in your finances.
Money journaling also helps clarify your thoughts and feelings about money and connects them with the numbers. The notes in your journal can help you think through what you truly want out of your finances. It will identify what needs to be lifted to the top or your financial priorities and what obstacles are standing in the way.
2. Follow a "Get To" Plan: I have renamed our budget as a "get to" because budget has negative connotations and constraints. We "get to" choose where our money is used, and we decide what is most important to our family now and in the future. It's important to know where each dollar is going to evaluate our priorities and where adjustments need to be made. Review and categorize spending over the past three months to know where it's going. Call your budget whatever you want. The idea is to create a positive attitude towards your money and keep you engaged with your budgeting plan.
3. Be Prepared for Income Increases: When you receive a promotion, or a bonus comes your way, have an automatic spot for it be deposited. Emergency fund first, retirement second, and then consider a college savings plan or saving for a down payment for a large expense in the future. Maybe this formula will help: Save 80% of every increase in salary or pay, until you are able to save at least 20% (at a minimum) of your take-home pay annually. For example, if you received a $10,000 pay increase to put at $100,000 you would save $8,000 of that pay increase and have a goal to save $20,000 annually. Following this plan will limit what money is available to spend on your wants and not forget about your future needs.
4. Get a Visual: There have been plenty of times I have seen clients in denial about their higher spending and they adjust their definition of moderation as income increases. Extra purchases are not forbidden or excluded. We all want to enjoy life and be more comfortable. The real problem is when someone is determined to have everything all at once and set the bar higher and higher. Tracking credit card balances at the end of each month is an easy way to identify lifestyle creep. Just think back five years ago to what it cost to pay off your credit card each month and compare it to what it takes to pay it off now. To gain a visual impact of the extra spending put it on a graph and see if the line moves steeply up and to the right. Then plot your income on the same graph and how the the two lines move together over time.