Do you rely on credit cards for regular expenses or have trouble saving money? If so, then ‘lifestyle creep’ might be the elephant in the room.
The concept of lifestyle creep, also known as lifestyle inflation, is straightforward and easy to understand. Yet, that doesn’t stop most people from falling victim to it, which is exactly why it’s so dangerous.
Lifestyle creep is the gradual increase of your spending as your wage increases. You get a raise, so why not buy that new pair of shoes? Maybe you can even afford a more expensive apartment? You can finally get that fancy car you’ve always wanted! This is the type of thinking that can get you into trouble. Before you know it, you’re paying for a gym membership you don’t use, a truck you don’t need, and a house that’s too big.
Before making these purchases, you need to make sure you have budgeted properly for retirement. Here’s an easy retirement calculator you can use to get a sense for how much money you’ll need to retire.
The danger of lifestyle creep is that it happens gradually over an extended period of time, making it hard for you to notice. Think of it like a hot tub. If you get in and raise the temperature of the water, you’ll acclimate to it as the water gradually heats up. There you are sitting comfortably when a newcomer comes by to join you and tries to step in but finds it too hot.
At some point you might have told yourself that you can’t save now because you’re just starting your career, and you’ll save more when you make more. I know that thought has crossed my mind. As a whole, Americans aren’t good at saving for retirement. We put off saving today and, instead, defer it until tomorrow. But the cycle simply repeats again.
When you were 22 years old, it was easy to think you’d be able to save more when your salary doubled or you got the big promotion. What you didn’t take into account was that you wouldn’t want to live with a roommate when you turned 32, that you’d now have a car payment, or maybe even child care expenses. All of a sudden, you need that raise, simply to stay afloat with all of the payments, let alone save for retirement.
You don’t want to wake up one day in a haze, realize you have a ton of credit card debt, and be unable to recall how or when you spent all of your hard-earned money. This is exactly why you need to curb your lifestyle creep before it gets out of control.
Here are three ways you can avoid or manage lifestyle creep.
1. Create A Budget – The Lifestyle Creep Antidote
The only way to understand and change how you spend your money is to track how and when you spend it. Making and keeping a budget is the #1 thing you can do to ensure that your spending stays in check while your income grows.
One key thing to keep in mind as you budget is that you should prioritize experiences over physical products. The reason is simple. Research shows that experiences bring you more happiness. If you are able to limit your spending but increase the amount of satisfaction you receive from the money you spend, it’s a win-win. You’re better off financially and you and your loved ones will enjoy it, rather than feel like you’re suffering by tightening the purse strings.
2. Plan For Wage Increases And Limit The Growth Rate Of Your Expenses
If you go from making $65,000 to $80,000 in take-home pay, you need to make sure you are ready with a plan when the larger paychecks hit your account. Leave that extra cash sitting in your checking account and it will practically beg you to spend it. Savings accounts with higher interest rates, like those offered by online-only banks, or retirement accounts are both amazing places to direct those extra dollars.
One rule of thumb is to save 75% of every increase in salary or pay, until you are able to save at least 20% of your take-home pay annually. In our $80K example, you’d want to save $11,250, since that’s 75% of the raise amount of $15K. You’ll continue to do this until you’re able to save at least $16K annually.
That jump to $80,000 is a 23% increase in salary. Inflation naturally causes the cost of living to increase, and you should be able to enjoy a higher standard of living over time if you’ve earned it, but don’t forget to save for the future.
3. Develop A Side Hustle And Save 100% Of That Income
We already know that nearly 40% of Americans have a side hustle, which is a part-time job or hobby that produces an additional source of income. Most appealing is that the average side hustle generates over $8,000 of additional annual income, more than enough to fully fund a Roth IRA for a year. Be careful that you don’t just spend the money on new toys or purchases. Otherwise, you’ll slip right back down the slippery slope.
Do you know what you need to do to help stop the creep?
Camilo Maldonado is the Co-Founder and CEO of The Finance Twins, a site managed with his identical twin brother dedicated to covering the best practices for personal finance and overcoming financial hurdles like large amounts of debt.
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