Here’s a fun question for you: how do you prevent lifestyle creep, or turn it around if you realize it’s happening?
According to Investopedia:
Lifestyle creep occurs when an individual’s standard of living improves as their discretionary income rises and former luxuries become new necessities. The rise in discretionary income can happen either through an increase in income or decrease in costs.
A hallmark of lifestyle creep is a change in thinking and behavior that sees spending on nonessential items as a right rather than a choice. This can be seen in the spending decision attitude of “you deserve it,” rather than thinking of the opportunities that saving money would provide.
Here’s what I’ve done, when I’ve noticed it happening, but I can’t wait to hear what you do!
{related: not sure what to do first/next in your personal finance journey? here’s our money roadmap}
How to Recognize Lifestyle Creep
Have you ever gotten a raise of $5,000 or $10,000 — and felt absolutely no difference in your day to day life? Assuming you didn’t immediately funnel the money to automatic investments or automatic saving goals, this is lifestyle creep — you are unwittingly, somehow, spending $5,000 or $10,000 you aren’t noticing. (Fine, fine, whatever the raise is after taxes is what you’re spending.)
That’s a lot of money! If you were to lose it all at once you’d say, WHOA. But instead it’s just kind of seeping out through all those little purchases and decisions you make on a daily basis.
Maybe you go to Starbucks 3 times a week instead of 2. (Cue the old example about avocado toast…) Maybe you bring your lunch one day less, or start buying more prepared foods. It’s probably not big purchases, but instead small, daily choices.
{related: financial tips for new lawyers (or other women in their first high-paying jobs!)}
How to Prevent Lifestyle Creep
Consider the boring financial goals first. Are you maxing out your retirement accounts? Do you have any outstanding debts like student loans to pay off? Always look to the boring, tax-savvy goals first.
Other tax-savvy goals we’ve talked about: 529 accounts. Roth IRAs. Health saving accounts.
Once you’ve considered the boring stuff, then:
Make it intentional. It’s a weird rule to have so near the top, I know, but the thing that kills me about lifestyle creep is that it doesn’t FEEL like you’re suddenly living a more luxurious life or taking exotic vacations – with me, at least, it’s just that I’m regularly making decisions I wouldn’t make if I had a tighter budget.
So I say it’s important to set your priorities. For example, when I was single and just out of law school, I really had no idea what was coming next, so my goal was to save as much as possible.
Would I stay in Big Law? In NY? Would I marry someone with debt? Etc, etc. So in my mind, there were no intentionally good reasons to overspend. I gave myself a reasonable budget, got an affordable apartment, and as quickly as I could, got any extra money out of my checking account.
These days, it might look a bit different – we’re trying to travel more, so the purchases we make along those lines are all ok, at least in my head.
Could we have choose cheaper hotels, or get flights at less than ideal times? Sure – but that won’t make us want to travel more, so I’m ok with spending within reason.
Another thing I’m happy to spend money on, at least at the moment, is making our lives easier — so it’s worth it to me to buy the pre-chopped vegetables instead of doing it myself, or buying the rotisserie chicken meat that’s already been pulled off the bone.
After all, it’s OK to spend more on things you love or to make your life better — to me the important thing is that you’re choosing to do it intentionally.
Reassess saving goals with these intentions in mind. I’ve written before of my love of automatically saving for multiple financial goals — and this is one of the biggest things that I do first when I realize there’s lifestyle creep happening.
What are our goals? Where could we be saving more? For our travel goals, this is easy enough — we start to put extra money into the Vacation fund. If it had previously been $250 a month, I ask myself if we could bump it up to $350 a month — or more. When the account grows large enough, I usually notice and say, gah, I’ve really got to plan a trip somewhere.
Make a budget for squishier priorities. For example, my “make life easier” goal is much trickier to quantify in terms of bumping up our monthly savings. If you previously had a budget for groceries, it’s easy enough to give yourself more money for that budget.
If you haven’t already been keeping a budget, you could go back to figure out how much you HAVE spent historically — programs like Mint are great for this — and then adjust accordingly. But if that sounds unappealing, there’s always the final option:
Get the money out of your checking account. Because we typically don’t follow a strict budget, this is what I usually end up doing — but a warning that it makes you very uncomfortable!
It’s similar to the way that some people have a pair of pants that, if they don’t fit, you know you need to dial back the food — when I start having to move money around from various accounts to pay the credit card bill, I know it’s time to cut back.
Sometimes I even get more austere by intentionally upping other saving or investing goals, or trying to keep only $X in my checking account and sweeping the rest into investment or saving goals. It’s uncomfortable for a few months — but it usually works to help me reign in my spending, while keeping us on track for larger goals and priorities.
{related: how to set up automatic investing}
Readers, what about you — how do you prevent lifestyle creep? How do you recognize it’s happening, and how do you turn it around when you realize it is happening?
