If you have wondered what the term “lifestyle creep” means, you are not alone. This is a term that is often used but not always fully understood.
Lifestyle creep can be very dangerous for your finances and quickly lead to debt if not careful.
In this blog post, I will define lifestyle creep, discuss some warning signs, and provide some insights on how to avoid it.
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What is Lifestyle Creep?
Lifestyle creep is defined as “a gradual increase in spending that occurs when income increases or lifestyle changes.” It’s that tendency to spend more money as your income goes up. This can be a hazardous trap because it can quickly lead to debt.
It feels great to get a pay raise or bonus at work, but oftentimes it leads to more spending or even living outside of our means.
Let’s say someone starts with a salary of $40,000. After working very hard over the years with regular salary increases, and they are now making $70,000.
If not careful, too much money could be spent on wants such as clothes, eating out, or buying new things. Many of us enter this way of thinking and unfortunately end up in debt, regardless of having more income.
Rather than saving or investing the extra money, too many of us go out and spend it all, which can quickly lead to a worse financial position.
Another thing to keep in mind is to calculate your net income. A $2,000 raise will be taxed so it’s important to know exactly how much extra money you have each month and not miscalculate.
What Are the Signs of Lifestyle Creep
There are several warning signs that we should all keep in mind that can lead to lifestyle creep. If you notice any of the following, it may be time to reevaluate your spending habits.
Buying new clothes more often: If you find yourself shopping for new clothes more frequently, it may be a sign that you are spending too much money. Try sticking to a budget and only buying clothes when needed.
Eating out at restaurants more often: Going out to eat to celebrate your new raise once or twice is fine, but if you are doing it all the time, it may be a sign of lifestyle creep. Try to cook at home more often and only eat out on special occasions.
Taking more vacations: If you are planning more and more vacations, it may be a sign that you are spending too much money. Try to take one or two vacations per year and stick to a budget while you are on vacation.
Upgrading your car or home: This is commonly known as “keeping up with the Joneses.” Just because your neighbor gets a new car or house does not mean that you need to as well. It can be difficult at first, but resisting the urge to keep up with the people around you will provide you with many benefits.
Credit card debt is increasing: With a new raise, you may be tempted to use your credit card more often. However, this can lead to debt and financial problems down the road. Try to pay off credit card balances each month and only use it for emergencies.
No any extra funds to save or invest: After a raise, you should hopefully be able to save or invest at least some of the extra money. If not, it may be a sign that your spending is out of control. Try to automate your savings and investments so that you are not tempted to spend the extra money.
If you notice any of these signs, it is important to take action immediately. Lifestyle creep can quickly lead to debt and ruin your finances if you do not catch it early on.
How to Avoid Lifestyle Creep
If you believe you may have become a victim of lifestyle creep, don’t worry! There are ways to switch your spending habits and get back on track.
Here are a few tips:
Prioritize Your Money: This can be done in different ways. There is zero-based budgeting for example where you track every dollar coming in each month and every dollar spent.
No matter the method you choose, the goal of prioritizing your money is to control where it goes each month by sending your income to the most important categories first such as bills, savings, paying off debt, and investing.
A great way to create a budget without lifestyle creep is to use percentages rather than dollar amounts. As your income increases, your budget should automatically adjust without you needing to make any changes.
For example, if you want to save 20% of your monthly income, you would put $400 into savings if you make $2000 per month. If you get a raise and start making $3000 per month, you would then put $600 into savings.
The percentage-based budget saves you more money as your income increases automatically. Additionally, you don’t have to make any changes to your budget.
Save first, spend later: A great way to avoid lifestyle creep is to save your money and spend what is left over. Although this seems common sense, it can be easy to forget when you have extra money in your account.
Try setting up a direct deposit from your paycheck into your savings account. This way, you will never see the money and will be less tempted to spend it.
Related Content: How We Save 56% of Our Income
Invest in yourself: One of the best investments you can make is in yourself. Try to invest in your education or career to earn more money down the road. This will help you keep up with inflation and avoid lifestyle creep.
Be mindful of your spending: It is important to be aware of spending habits. If you are always buying new clothes or going out to eat, try to cut back in other areas.
There is nothing wrong with treating yourself occasionally, but let’s try not to get out of control here. 🙂
Talk to a financial advisor: A financial advisor can help you create a budget, save for retirement, and invest in yourself.
They can also help you stay on track if you have already started to creep into lifestyle inflation.
Live below your means: It is important to live below your means, even if you are making a good income. This means spending less than you earn and saving and investing the rest.
How to manage your money to live below your means can be daunting, but it doesn’t have to be. There are some simple rules that you can follow to help make managing your finances easier.
The 50/30/20 rule is one such rule.
The method states that you should allocate 50% of your income toward essentials, 30% towards wants, and 20% towards savings.
Invest in cash-flow-producing assets before you buy liabilities: It is important to invest in assets that will produce income. This may include investing in real estate, stocks, or bonds.
Investing in these assets can create a passive income stream that can help cover your expenses.
For example, if you want to improve your lifestyle by subscribing to a $100 monthly gym membership, you should invest in assets that produce at least $100 per month. By doing you are improving your lifestyle without putting yourself at financial risk.
A great way to start investing in real estate without a lot of money is with Fundrise, a crowdsourcing real estate investing platform.
With investment minimums of ONLY $10, you can start making PASSIVE INCOME with your real estate investment portfolio!
Focus on improving your skills rather than acquiring stuff: One of the best ways to improve your lifestyle is to improve your skills. This may include taking free online courses, reading library books, or training to fit better.
Finding hobbies and passions that do not require much financial investment can help you live a better lifestyle without spending more money.
Don’t get too excited about promotions and stick to your financial plan: It can be easy to get caught up in the excitement of a promotion or raise. However, it is important to stick to your financial plan. Work on saving extra money that you make so you do not start lifestyle creep.
Lifestyle creep is a real problem, but it is possible to avoid it.
Following these tips, you can keep your finances on track and live a comfortable life without lifestyle creep.
If you are always living paycheck to paycheck, even after a raise, it may be time to look at your spending habits. Lifestyle creep can be a dangerous trap to fall into, but there are ways to avoid it.
Try to stick to a budget, save or invest your extra money, and resist the urge to keep up with the people around you. These simple steps can help you avoid lifestyle creep and keep your finances on track.
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!