How To Manage Lifestyle Creep

Lifestyle inflation, also known as “lifestyle creep”, is that slow but steady creep of spending more over time on luxury items and things that go beyond the typical basic necessities. A common phrase used to describe this phenomenon is known as “keeping up with the Joneses”. 

As income increases over the course of a career or we see our friends and neighbors with newer and nicer things, we tend to more easily justify an extra purchase here and there. 

For example, when your income starts to rise in your 30s, perhaps after an especially frugal 20s, you might start thinking “I deserve this new car!”

This impacts your financial situation especially in terms of financial independence because it can make a person more reliant on their higher income to cover the new monthly car payment or higher end subscription service. 

In the investment world, we tend to think about risk in terms of how the stock market goes up and down over time, but the other way to view risk is in terms of how much you have to rely on your current income and what the implications of a pay cut or job loss might mean for you or your family. 

On top of that, lifestyle creep can lead to spending more money over time rather than reallocating those resources towards retirement savings and investments.  

Make a Plan for Your Money

Knowing where your income goes each month by having a budget or cash flow plan in place not only gives you insight about how you’re spending money, but what you value as well. It will allow you to intentionally and effectively reallocate the extra income to other sources, such as maxing out your employer sponsored retirement plans or Roth IRA.

In addition, avoid the temptation to blow your budget by designating a “discretionary” or “fun fund”/whatever you’d like to call it and set it aside in cold hard cash! 

Make sure everything else that can be automated (utilities, cell phone bill, rent/mortgage, insurance payments) is set up accordingly. In other words, designate part of your budget each month that you can spend 100% guilt free on anything you want. 

When that cash is physically gone, that’s it, and you have to wait until next month to tap into your discretionary fund. For example, let’s say you want to set aside $100 each month to spend on anything – be it eating out, clothes, or any spur of the moment purchase. Go to the ATM or bank and actually take out $100 in cash. 

Most of us are accustomed to paying for things with cards or digitally, so the benefit of taking out your discretionary fund in cash is twofold – it will more than likely be the only cash you’re carrying and no need to track every little thing you decide to spend it on because when it’s gone, that’s it for the month!   

Automate Your Savings and Investments

Automate your retirement savings accounts. One of the huge benefits of an employer sponsored retirement plan like a 401(k) is it allows you to put your retirement savings on autopilot which is ideal from a behavioral finance standpoint. 

When you get the raise or your income goes up, consider increasing the percentage you contribute to your workplace plan accordingly. For example, if you got a 3% raise see if it makes sense to increase your 401(k) contribution by 3%. 

This way, you are still “rewarding” your future self with your well-deserved raise and setting aside money to fund the lifestyle you want in retirement. 

Meal Plan Every Week

Cut back on your monthly food spending by including how many times you plan on eating out into your meal plan for the week. This is another way to cut back on the guilt we sometimes feel when we decide it’s too late to cook or we just don’t feel like it. 

For example, plan out five meals to prepare at home for the week and pick two restaurants to eat out at that week. It doesn’t matter where or when necessarily, just that you know in the back of your mind you have two dining out options to use at any point during the week. 

The meals you plan on making at home will drive what’s on your grocery list and help you avoid taking home random items from the store that weren’t part of your original plan! 

Deciding to eat out ahead of time will help as well, because it won’t be a splurge knowing that it’s part of your monthly/weekly spending plan. 

Plan Your Big Purchases Ahead of Time

There’s nothing wrong with treating yourself every now and then, especially after a well-deserved promotion and raise, but be intentional about what you want to splurge on. 

For example, if you want to get into cycling and making more money will allow you to do so, plan out the costs ahead of time so you have an idea of how much you’ll need to spend on the bike, gear, etc. before your income goes up. 

This way you can spend a targeted amount on a new lifestyle or hobby, rather than letting it creep up over time. 

Who Your Spend Your Time With Matters

Surround yourself with friends and family members that are in the same life stages and have similar goals. The people we let into our lives have a surprising amount of impact on how we spend our money and what we tend to value. 

If everyone in your circle is intent on a monthly trip to the mountains or buying the latest trend, that can have a meaningful impact on your cash flow and bottom line. 

Ultimately if you’re trying to avoid lifestyle inflation, it’s going to be easier to do so surrounded by people with common goals in mind.

Summary

Lifestyle creep is the strong force telling us “you deserve this” but slowly chipping away at our ability to be financially independent. There is more competition for our hard earned income every day and it’s all too easy to give in to the allure of another splurge or new subscription service that is not necessarily needed. 

The key is to start making your money work for you by investing it rather than letting your present lifestyle prevent you from living your financially independent future. 

After all, our ultimate goal in working with you is to help put you in a position where you can decide when to stop working or maybe start that business you have always wanted to.  

As always, do not hesitate to contact us with any questions or if you just need some ideas on how to allocate the income.

Before you take on any investment or retirement strategy, it is vital that you seek out proper investment and tax advice beforehand. Investment performance is never guaranteed and investments may lose some or all of their value. On top of that, there may be severe tax consequences if withdrawals are taken improperly and can have a significant impact on your portfolio and retirement. Although we provide Investment Advice and Personal Financial Planning Services, we at MWM do not provide tax advice and any tax advice should be rendered by a licensed tax professional such as a CPA.