How to Prevent Lifestyle Creep from Impacting Your Financial Future

Financial Planning | Life Events

 Peter Lazaroff By: Peter Lazaroff
How to Prevent Lifestyle Creep from Impacting Your Financial Future
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Sometimes familiarity can breed irresponsibility, especially when it comes to your personal finances. Once you start making more money, it's only natural to start spending more. With all that extra cash, you may decide it's time to relax your budget and start indulging in a few luxuries. Soon, you might start getting used to overspending, and it's a hard habit to break, even if the added spending is starting to impact your savings plan. To exacerbate the problem, your increased income may be giving you a false sense of security about your finances.

You don't want to stop buying those nonessentials, but your familiarity or comfort level with your current lifestyle may be causing you to be irresponsible with your money management. This is what leads to an all-too-common phenomenon known as “lifestyle creep.”

What Is Lifestyle Creep?

If your spending habits are negatively impacting your retirement savings, you may be suffering “lifestyle inflation,” or “lifestyle creep.” This happens when your discretionary spending habits start getting closer to equaling, or even outpacing, your income. And even if your finances aren’t in any danger yet, your spending may be reducing the amount of money you’re putting into your 401(k) or IRA plans.

Examples of Lifestyle Creep

Lifestyle inflation often starts with an abundance of little expenditures, including:

  • Adding premium streaming or cable channels
  • Buying extra treats for holidays or special events
  • Spending more online
  • Splurging for more-expensive vacations
  • Going out to eat more often

This type of spending has a way of adding up. As a result, lifestyle creep can quickly drain your retirement savings before you even notice it. And since we’re creatures of habit, it’s all too easy to continue these spending behaviors, even if they impact our finances negatively.

Effects of Lifestyle Creep

While income increases and pay raises may seem like a solution to lifestyle inflation, they can actually make it worse. Many people respond to making more money by spending more money. As a result, their savings accounts don’t benefit from their increased income. Plus, those pay raises aren’t going to keep coming indefinitely.

According to studies from the Federal Reserve Bank of New York and the U.S. Labor Department, most pay raises (or inflation-adjusted wage growth) occur during a person’s early working years, then level off in mid-career. This further validates the wisdom of keeping lifestyle creep under control while your pay raises are still peaking, before they plateau and decline in your later career years.

One of the biggest signs of lifestyle creep is having less money to put into your savings or retirement accounts each month. If you’re already noticing more money going out while less is coming in, then it’s time to make a change.

Avoiding Lifestyle Creep

These tips can help you prevent lifestyle creep by making better financial decisions and modifying your spending habits.

Create a Goal-Based Budget

One pro tip is to create a reverse budget that focuses on how much you’re saving, rather than how much you’re spending. In reverse budgeting, you simply identify the amount you need to save and make those savings an automatic part of your budget. Essentially, you’re treating your financial goals as if they were actual bills you need to pay each month.

Here's how it works:

  1. Add up the amount each month that you need to reach both your long-term and short-term financial goals. Upcoming expenses should include your projected retirement savings for your IRA or 401(k). You’ll also need to include funds for emergencies, credit card and loan repayments, plus any big-ticket items you’re planning on buying (such as a car) or prospective splurges like a vacation or house renovation.
  2. Total the cost of these items, then average the total out over a payment period of five years.

This five-year payment figure will indicate how much you need to save each month. Your next step is to add that amount to your savings account.

Automatically Escalate Your Savings

This simply involves taking the amount you need to save and transferring it to your savings account. For example, say the monthly amount you need to save on your five-year plan is $5,000. Your next step would be to set up an automated withdrawal that sends $5,000 from your checking to your savings account each month. This way, you’ll automatically have the amount diverted to savings, so it won’t be there in your checking account to tempt you into unwise spending habits.

Surround Yourself With Like-Minded People

It’s all too easy to fall into bad financial habits if you’re surrounded by big spenders. You may want to keep up with the crowd, or you might feel the need to maintain your social status through expensive behaviors.

Some people feel that it’s necessary to spend in order to live up to a certain standard of living. This is fine if you’re making enough discretionary income, but far too often, people don’t have enough extra cash to support the way they’d like to live. And even if the cash is there, it can be a tremendous financial risk to spend it unless you’ve saved money for your long-term financial goals.

If you’re serious about saving money, then now’s the time to shake off that crowd and surround yourself with people who are more rational and responsible about their financial choices.

Avoid Scrutinizing Social Media

Social media may seem like a great way to keep in touch with family, friends, and world events. But for the platforms' creators, social media’s primary goal is to make money through advertising. Every time you visit Facebook, Instagram, YouTube, or any other platform, you’re bombarded with advertisements that lure you into buying the latest and greatest version of whatever is out there.

If you can train yourself to use social media for your own purposes — communication and knowledge — and not get sucked into the daily deluge of ads, you can come out ahead financially.

Visualize Your Goals

When you’re at the gym, imagining yourself in a fit and trim body can help you through all those pushups - and you can use the same type of visualization with your personal finances. The next time you’re tempted by too many spending opportunities, remind yourself about your long-term retirement and saving plans. By visualizing your goals, you’ll quickly realize that saving money is more important than spending it on a designer coat or overpriced status-symbol car.

Treat Yourself, Strategically

It’s crucial to implement a plan that covers your financial goals and necessities first. If you can provide enough wiggle room to treat yourself as well, so much the better. Just remember, treating yourself doesn’t have to be a major splurge every time. And when a major splurge is called for, try to budget for it ahead of time.

Take Managing Your Money Seriously

Financial health plays a big part in your quality of life. It’s not a perk — it’s a necessity. And while luck can play a part, financial success is primarily about making intentional, well-planned choices with your money.

Toward that end, consider adopting a system that allows you to prioritize the things you need while separating them from the things you want. Once the necessities have been paid for, scrutinize your want list and see how you can make it more affordable. This may mean putting some things on the back burner or even eliminating them altogether and finding better alternatives for your lifestyle.

Poor consumption behaviors can devastate your savings account, but smart, systematic saving and investing decisions can repair the damage, boost your savings, and prevent your financial future from being further impacted by lifestyle creep.

Managing your personal finances doesn’t have to be a daunting proposition. By downloading Plancorp’s user-friendly goal-planning worksheet, you can organize your budget and plan for your short-term and long-term financial goals. Contact Plancorp and let us help you make better financial decisions for yourself and for your family.

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Peter Lazaroff, Chief Investment Officer, first took an interest in investing when his grandmother gave him a single share of Nike stock for his 13th birthday. Today, nearly 20 years later, his investment insights are highly sought after by local and national media. More »