For many people, one of the best benefits of a salary increase is the ability to spend more on purchases and luxuries. However, taking this approach has the potential to significantly harm your wealth-building potential over time. Commonly referred to as “lifestyle creep,” the tendency to spend more as you make more can have long-term consequences for your overall financial security.
In other words, as your income increases, it can be easy to “creep” toward spending more. While it’s okay to reward yourself with a nice lifestyle, this lifestyle creep can become a problem when it begins to impact your long-term financial security. And the consequences can impact everyone who experiences lifestyle creep, including high-net-worth individuals.
A common challenge with lifestyle creep is that often it prevents people from saving enough for the future. Remember that as your lifestyle standards increase, so does the amount you need to save to maintain those standards over the long term. That means your savings needs to grow alongside your lifestyle. This may seem obvious, but many people fail to increase the amount they save at the same rate they increase the amount they spend. And failing to do so can lead to big challenges down the road.
Let’s consider an example. Let’s say you recently received a promotion at work, which came with a nice raise. You’re a golfer and decide to reward yourself with a country club membership, something you’ve always wanted. Your membership costs $25,000 per year, which you can easily take on with your new salary. But ask yourself, “Will I want to remain a member after I retire?” If you decide that your retirement goals include regular rounds of golf at the club, it’s important to save for this lifestyle expense in order to maintain it in the future. If it stresses your budget too much to pay for the membership and increase your savings, this lifestyle creep may put you in a tough spot once you’re no longer drawing an income.
Fortunately, there are some simple steps you can take to avoid lifestyle creep.
1. Spend less than you make.
This simple budgeting basic applies to everyone, even those with a high net worth. As your income increases, you may be tempted to spend more in order to “keep up with the Joneses.” Perhaps you’re afraid of missing out on opportunities with high-income friends, or you have a desire to showcase your success with a larger home or expensive car. While there’s nothing wrong with that, it’s important to make sure your purchases leave enough room in your budget to save and plan for the future.
2. Focus on your priorities.
What matters most in your life? Spending time with family? Traveling the world? Supporting charitable causes? Avoiding lifestyle creep doesn’t mean adopting a no-spending lifestyle — it means prioritizing your spending on the things that matter most to you while also taking steps to help ensure you’ll be able to continue focusing on those things in the future.
3. Pay yourself first.
Another great way to avoid gradual lifestyle creep is by making a commitment to paying yourself first. As your income increases over time, make an effort to prioritize increasing your savings rate as well. This doesn’t mean you can’t spend on yourself. Rather, it serves as a reminder to give yourself a cushion to help ensure you’re able to maintain your lifestyle over the long term.
4. Find balance.
As you grow your income and success over time, it’s important to spend money to enjoy life along the way. The key is to make smart, strategic spending decisions to increase your long-term financial independence rather than hamper it. Finding the right balance between treating yourself to life’s luxuries along the way and making sure you’re able to continue enjoying life long into the future can be a challenge, but it’s an important one to tackle head on.
This commentary is provided for general information purposes only, should not be construed as investment, tax, or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.
Katie Stephenson, JD, CFP®, is a Private Wealth Manager and Partner with Creative Planning. Creative Planning is one of the nation’s largest registered investment advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit creativeplanning.com.