What Is Lifestyle Creep?

What Is Lifestyle Creep?

Your lifestyle is the way you spend money, and what your day-to-day life looks like: the home you live in, the food you eat, the car you drive and the vacations you take. When you experience lifestyle creep, the amount your lifestyle costs each month increases with your income.

When it gets out of hand, lifestyle creep means less money for emergency savings, retirement or a down payment on a home. Even if you're earning a generous income, you might end up living paycheck to paycheck or incurring overwhelming debt.

Signs of Lifestyle Creep

You may be experiencing lifestyle creep if:

• The things you used to think of as aspirational or luxury spending, such as a high-end car or the new iPhone every time it's released, now feel like necessities.
• There's less money than you expected in your bank account at the end of the month, and you don't have a clear idea of where it went.
• You're more comfortable with increased day-to-day expenses, like daily takeout lunches or higher grocery bills from a premium supermarket.
• The idea of going back to the way you previously lived in order to save money seems very difficult.

How to Avoid Lifestyle Creep

The goal isn't to deprive yourself of nice things whenever you get a raise or a higher-paying job. It's to make sure you're setting aside enough for short- and long-term financial goals, and to prevent the need for a massive spending reset if you lose your job, retire or decide to slow your work schedule to raise kids.

To keep discretionary spending in check, consider these strategies:

• Try out the pay yourself first savings method. This strategy encourages you to transfer money to your emergency fund, retirement or other short- and long-term savings accounts as soon as you get your paycheck or at the start of the month. That way, you spend what's left over, not the other way around.
• Automate your savings and investments. Setting up automatic payments is one of the top ways to prevent spending from ballooning out of control. As you decide which savings goals are most important to you, strongly consider making automatic transfers to achieve them.
• Create a monthly spending plan and stick to it. As your income increases, recalibrate your budget. For example, earmark at least half of any additional money you earn to saving, paying down debt or investing and spend the other half any way you like. That way, every boost to your income improves your financial security in addition to improving your lifestyle.
• Set goals and track your progress. According to experts, some of the key financial goals to work toward include saving at least three to six months' worth of basic expenses in an emergency fund; saving 10% to 15% of your gross income per year for retirement; and saving regularly for a down payment on a house or new car to reduce the need to borrow. Retirement savings targets are often linked to your income, so ideally you'll contribute more toward retirement accounts as your earnings grow.
• Limit revolving debt. Increasing credit card debt is a sign that your lifestyle is no longer affordable. Maintaining too much revolving debt can also hurt your credit, which makes it harder to get the best terms on new debt that helps you meet your goals, such as a mortgage or car loan.

What to Do if Your Income Increases

When you start to earn more money, celebration—and treating yourself—is in order. But so is a careful assessment of how best to use your new income. Here's what to do with it:

• Calculate how much more you're actually earning. Identify how much you're taking home after taxes. For example, a single person in Massachusetts earning $50,000 who gets a $10,000 raise may only take home about $600 more per month after taxes. Plan to put half of that ($300 in this example) toward savings, paying off debt and/or investing before spending the other $300 per month.
• Start or strengthen your emergency fund. If you don't already have emergency savings, set up a transfer for the entire amount you're planning to put toward financial goals—in our example above, $300 per month—until your emergency savings account is fully funded. This will provide security in case you lose your job or have an unexpected expense.
• Pay down debt. Next, pay down high-interest debt—particularly credit cards or other types of revolving credit. If the interest rates are especially burdensome, put that whole $300 per month toward it for a period of time. If you have lower-interest debt that you want to get rid of, you can pay it down more slowly.
• Add to your retirement fund. Choose an amount you want to put toward retirement—perhaps $100 per month while you're also paying down debt, for example—and set up an automatic transfer to your retirement fund. Or increase your 401(k) contribution at work.
• Save for other purposes. Set aside any additional money from within your extra-income bucket for other financial purposes, like personal investments in a brokerage account, a new car, a sabbatical, a child's college fund and more.
• Spend up to half your extra earnings however you please. You deserve to enjoy the fruits of your hard work. Allow yourself to spend part of your extra income on new electronics, hobbies or whatever you choose.

The Bottom Line

Lifestyle creep doesn't have to be dramatic for it to have an impact on your financial life. If you're starting to feel the pinch from the extra streaming services you've signed up for or the higher credit card bills since your last raise, it's not too late for a reset. Take a close look at your spending and calculate how much additional money you're earning, and make a deliberate plan. You'll feel proud of both the accomplishments that got you the additional income, and of how you're putting that money to use.