We’ve either experienced it first-hand for ourselves, or we’ve seen it happen to our close friends.
That weekly paycheck? Gone.
That first raise and promotion increasing your income? Spent to celebrate over an expensive outing and that stretches you well beyond your monthly budget.
That second raise? History repeats itself. But this time, you’re going bigger. Society tells you it’s time to finance a new car, get a boat or motorcycle, or maybe even buy a new house.
There’s a cultural acceptance, maybe even expectation, that as we earn more money and increase our income, our spending needs to follow suit.
Unfortunately, financial slips and excessive spending that have you keeping up with the Joneses result in what’s known as lifestyle creep or lifestyle inflation.
Lifestyle creep is when your lifestyle expenses and spending habits outpace and extend well beyond your income and the money you earn. The end result isn’t a good one for your financial plan — it can prevent you from building an adequate emergency fund and properly saving for your retirement.
Avoid lifestyle creep using these 8 tips
Live modestly throughout your working years and enjoy your retirement years with all the pleasures life can offer. The formula is simple. However, putting it to action is a bit harder than it sounds.
Getting a raise and increasing your income should be looked at as an opportunity to improve your savings rate and retirement accounts. Instead, it’s often perceived as an open invitation to spend more and to spend often.
That’s not to say you shouldn’t reward yourself for a job well-done. After all, you earned it. But don’t let it alter your lifestyle or get in the way of reaching your goals.
Here are seven ways you can effectively avoid lifestyle creep:
1. One-time rewards
That first big paycheck you earn after getting your raise and promotion? Spend it. Treat yourself to something you’ve always wanted.
But before you do that, make sure you’ve paid your bills and any necessities you’re responsible for covering first. After that, you won’t need to worry about having regrets.
If this sounds a little counter-intuitive to avoiding lifestyle creep, it’s not. What we’re saying here is to absolutely go out and reward yourself, but rather than doing so impulsively and on a recurring basis, be responsible. Treat yourself to a limit of one really big reward for all of your hard work, and only do so once all of your bills and financial obligations are taken care of.
When you’ve splurged and have finished rewarding yourself, it’s time to go back to living the same way you were before. Now, you can start putting the extra money you’re earning into savings accounts, retirement funds, and towards other financial goals. You can enjoy it later in life, and more of it.
2. Set and track financial goals
More often than not, those that are constantly exceeding their spending limits with poor financial decisions are doing so because of a lack of focus.
This directly boils down to not having proper financial goals that are there to help guide you with your money decisions and financial habits.
Having financial goals can be one of the best ways to keep you focused, improve your habits, and keep you motivated to make steady improvements to your financial life.
When you’re setting goals, make sure that you are setting SMART financial goals to improve your outcome and keep your eyes on the prize.
3. Budget your spending money
If you’re serious about taking complete control of your spending (and savings), then having a personal budget is a must. You cannot afford to overlook this step.
Budgeting is a great financial exercise that will give you a snapshot on a periodic basis of the money coming in, what you’re earning, and the money going out, what you’re spending. You’ll quickly be able to identify patterns and trends in your spending habits, and chances are you’ll identify what areas you can improve almost right away.
As a quick example, maybe you notice that you’re spending more than $100 a night going out for dinner and drinks with friends around three or four times a week. That’s anywhere from $300 to $400 every week, without including transportation or other costs factored in. If this is you, cut it back by one night, then two.
The best part of a budget is that it keeps you within your boundaries, while providing room for flexibility. Just don’t let your budget become one that constantly adjusts — that defeats the purpose of having one.
4. Max out your retirement funds
Instead of maxing out your credit cards and spending, make a financial goal that works toward increasing your savings rate and maxing out retirement accounts.
The maximum contribution limit for a 401(k) plan in 2019 was $19,000, and $6,000 for a traditional IRA. Do yourself a favor and max out both. Combined, that’s $25,000 every year in principle that will grow through compound interest until you retire.
For the best results, look to your budget (the step right above this one) and see where you can trim or eliminate your spending entirely. Instead, shift that “available” money and put it towards maxing out these accounts.
Additionally, remember the golden rule of investing: pay yourself first. You can achieve this through automated contributions, making sure that as soon as you get paid, this money is already being allocated to these accounts.
Lastly, do not touch these accounts. Not only can there be penalties for withdrawing the money early, but you’ll also jeopardize your future retirement and lifestyle.
5. Invest any extra money
If you’re fortunate enough to have additional money left over after maxing out $25,000 in retirement funds, please don’t go spending it.
Instead, look at investing the money in other places that will continue improving your financial situation. Look at contributing to your emergency fund and building it up so that you are able to cover at least three to six months of your income. At the same time, you can work on contributing to a high-interest account for your sinking fund, using this to save for a big vacation, a new home addition, or any other planned expense.
6. Avoid dramatic life changes
When it comes to overall financial well-being, the impact of this one is seriously under-estimated.
Do not significantly increase your cost of living and your overall lifestyle just because either your friends are doing it, or because you can afford to in your current situation. This is something that requires careful consideration and financial planning because the consequences and impact stretch well beyond your current situation and impact your financial future.
When in doubt, stick to your plan, consult with a professional, and look toward your financial goals.
7. Review and change your circle
This one can be tough emotionally and will likely impact your social life. But you can’t afford not to carefully consider and then re-consider who you are spending your time with.
If there are close friends that treat you with disdain if you don’t live in a fancy home or drive an exotic car, then it’s time for new friends. It’s important not only for your finances, but for your overall well-being that you are surrounding yourself with friends who understand and support you in making sure that you do not fall into the trap of lifestyle creep.
By no means does this imply that you shouldn’t hang out with wealthier friends, but be clear and realistic about your budget limitations and don’t feel pressured into going to restaurants or on outings you can’t afford.
Be prepared to take a rain check, suggest a more budget-friendly option, or seriously limit when you do say yes.
8. Create a financial plan and stick to it
Last, but certainly not least, it’s critical to your financial success that you build, maintain, and stick to your financial plan. In reality, this should be one of the first things you do, but you can say we’ve saved the best for last.
Your plan will help you understand your overall financial well-being by tracking your financial progress, and by showing you the next steps you need to be taking to reach your goals.
If things feel like they are starting to slip, and get away from you again, your plan is there to keep you on track and moving in the right direction so that you are always focused on your final outcome.
Importantly, your plan looks at and breaks down more than just saving and investing. It captures your entire picture including insurance and estate planning so that you are always making the optimal decision with your money.
You can get access to a free financial plan and retirement calculator with Savology in just five minutes. By building your free financial plan, you’ll be well on your way to taking control of your finances and working towards your financial goals with confidence.
Your financial future starts today
Savology has helped more than 40,000 households across the United States improve their financial well-being by providing comprehensive digital financial planning. Users can get started with our free financial planning or premium monthly planning memberships, allowing them to build a personalized financial plan, holistic report card, personalized action items, and more. In addition to our consumer-facing platform, we’re helping employers across the country provide their employees with effective financial wellness benefits.