I was scanning Twitter the other morning and came across a tweet from Twin Dad Money Coach of Twindadmoney.com. He brought up an excellent point about lifestyle creep, or lifestyle inflation, in personal finance. We talk a lot about how to make more money, build wealth through investing and basic personal finance topics. But, we aren’t discussing ideas on avoiding lifestyle creep enough.
Lifestyle creep is the idea that over time or as your income increases, so do your expenses. This could be that new Mercedes when you get a promotion. Or it could be buying a more expensive cable TV package because you want to watch more sports on TV. That zero turn lawn mower in your garage for a 1/2 acre lawn might be another sign. Basically, spending more on luxuries and convenience instead of keeping your spending on a budget.
How many people do you know that routinely increase their amount of “stuff”, always buying the newest and greatest, and constantly “upgrading” their life? I’d bet you know quite a few.
Now, is it really that dangerous? Well, it depends. If you are still saving and investing a considerable sum of your income as you pay yourself first, then ma6be not. If you are accumulating debt, or cutting back on investing, then most definitely dangerous!
Let’s explore 3 Simple Tricks for Avoiding Lifestyle Creep!
1. Pay Yourself First Automatically
When we make more money, especially early in our careers, it’s easy to spend it on things we’ve desired. In our minds, we’ve delayed gratification until this point and now that we can afford it. the biggest reason we delayed the purchase was we couldn’t afford, and now that is no longer an issue. This results in the 23 year old new grad with their first corporate job buying a brand new car on credit. On paper, it looks affordable, but its eroding your wealth building power.
To combat this desire to spend your increased income or windfall, try automating a predetermined percentage into savings or investment accounts.
By automating your finances, you can scale up your contributions to put a portion of your new income aside each year. If you get a 2% raise each year on a $50,000 salary, that’s a $1,000 raise. You could increase all of your contributions to be another 1% of your salary and spend the other $500. Automatic increases in your contributions is one of the simplest tricks to avoiding lifestyle creep. It takes the control or desire to spend your increase right out of your hands.
Do the same thing with any windfalls. Bonuses and tax refunds should all be treated the same way. The only difference is windfalls aren’t easy to automate. These you will need to deal with manually. So, it’s important to have a plan on how to deal with these.
Example for dealing with windfalls is by dedicating 50% of them to a goal that will ensure that you pay yourself first and will invest in you and your future. This could be dedicating 50% or more to debt pay off, stock market investing, real estate, learning a skill, or operating/scaling a business. This trick is essential to making your push for debt free living, financial independence, retiring early, or building generational wealth a success.
To visualize let’s envision a situation where you make $50,000 with a 3% raise each year and the possibility of a $2,000 windfall each year. You decide to invest in a Roth with 50% of your windfall each year and to scale up your 401(k) contribution by another 1% of your income each year until maxed at $19,000. You started at 10% contribution.
2. Avoiding Lifestyle Creep through BUDGETING
Maintain a budget. It can be a major pain, but it’ll go a long way in helping you keep lifestyle creep in check. Avoiding lifestyle creep can be one of your best moves to improve your finances, and a budget can be a sure fire way to do this. Tracking your spending and your income can make detecting changes easy. It also makes it more challenging to go outside of your spending limits, even if your income increases.
An automate budgeting tool like Mint, or Every Dollar can make budgeting easy. Set up your spending categories, allocate your preferred budget and link your accounts.
When budgeting I always start on paper, I like to write and rewrite, to try various set ups and to do the math myself. For me, it helps to visualize it and rework it by hand. By doing it by hand, I can make a lot of quick tweaks and adjustments and see my whole picture on one page.
When budgeting, find your average income and work off a number that’s just slightly below your average. This little trick, if you can afford it, helps skim a little off the top immediately for paying yourself. Then add up all your expenses from last month and divide them up in categories. It helps if you have been tracking your spending for a couple months to find patterns or at least an average.
I always suggest being cautious with your planned cuts in your budget when budgeting for the first time. If you overly cut back you are going to shock yourself into dropping the budget, 9 times out of 10. Try to just find places in your budget that you definitely overspend and trim it back to ensure you are below that income level.
Once, you have your categories set, your money allocated, and a system for tracking it all (Mint). Then you are all set to tackle your lifestyle inflation. But, the trick is going to be when your income is more than what you estimated.
Like before, have a plan for that extra money. If you have more left over at the end of the month in a category, or you earned more than you expected, have a place and a system for moving that elsewhere. Get that money out of your checking account and into something that can benefit your net worth.
3. Create a “Fun” Fund and an “FU” Fund
The two F-Funds you must own if you want to avoid lifestyle creep.
The “Fun” Fund is for exactly what it sounds like, for fun! Put money aside in this account to reward yourself for hard work and your successes (wisely!). This account is no strings attached (if you want). You can spend this money for a night out, or for a new phone, or for a random piece of art you think will look good in your living room.
This is money you’ve earned, and you are going to want to enjoy it, at least a little bit. Right?
The other essential account for avoiding lifestyle creep is a “FU” Fund. “FU” Funds are basically like an emergency fund on steroids. The kind that you use even though its not an emergency that you leave that crappy job right now. It’s your- take a leap of faith money. This is an account you will love watching grow. Choose where to put it wisely, you may need to access it some day. And heck, if you really love your job, you could transfer this money out to your retirement accounts or to pay down debts quicker.
Conclusion
In conclusion, lifestyle creep or lifestyle inflation, can be incredibly dangerous to ones’ finances. You want to manage it, to avoid it, and to never let it take over your life. Be proud of your hard work, but keep your eye on the prize- financial independence. Make sure that your money works as hard for you as you do for it.
In summation, there are three excellent tricks to help you avoid lifestyle creep in this article. Let’s recap them really quick:
- Pay yourself first automatically: Set a side a set amount of money out of any raises or bonuses before you have a chance to spend it.
- Budget: Know your expenses, track them, and keep a budget limit to constrain your spending.
- “Fun” Fund and “FU” Fund: Sometimes you need to enjoy yourself without any guilt. A “Fun” Fund can be just that. And your “FU” Fund is for making a leap of faith, if you reach that point.
I hope you got some ideas on how you can apply these tricks for avoiding lifestyle creep to your life.