Definition, signs, how to avoid it

  • Lifestyle creep is the common pattern of spending more money as you earn more money, getting used to higher levels of luxury and convenience as your new normal.
  • Lifestyle creep usually happens after someone gets a raise, a new job with higher income, or pays off debt.
  • The biggest sign of lifestyle slippage is a lack of savings for emergency or retirement funds.
  • Read more stories from Personal Finance Insider.

You might think that a pay rise means you’ll have more money in your bank account, but that’s not always true. In fact, lifestyle creep can mean you have less cash on hand.

Lifestyle creep, or lifestyle inflation, is excessive spending after your income increases. For example, if you get a new job that pays you $20,000 more per year in net pay but you decide to buy a (non-essential) car for $30,000, you will have more debt than before your raise. . Lifestyle creep can happen over the years and therefore be difficult to spot unless you stick to your budget.

Here’s what to know about lifestyle drift, how to tell if it’s affecting your life, and how to avoid it in the future.

What is Lifestyle Creep?

Lifestyle drift is increased spending after receiving a raise instead of saving the extra income. It can also happen after paying off a loan if you decide to spend the extra money rather than saving it.

“I’ve seen clients who are making more money have their financial plans worsen because of a lifestyle change,” says Clint Camua, regional manager and partner at EP Wealth Advisors in the Los Angeles area. .

With lifestyle inflation, the extras like entertainment subscriptions and restaurant dinners that you were getting rid of before your income increased now seem essential. It’s not just about buying things either – paying for new experiences can impact lifestyle too.

“For example, a couple who recently paid off their mortgage and want to spend the extra cash from paying the mortgage each month to travel more,” says Robin Aiken, director at Homrich Berg Wealth Management. Rather than funnel some or all of their new funds into a savings account, this couple wanted to use the entire amount for travel expenses.

How Does Lifestyle Creep Work?

Typically, lifestyle drift occurs when people start making more money, either by receiving a higher income through a new job or pay raise, or by paying off debts and freeing up money that was used for monthly payments. Once lifestyle inflation takes over, the new money is spent as fast – or faster – as it arrives.

Lifestyle drift is a problem because it can prevent people from saving the amount they will need for retirement or emergencies. About half of working Americans say paying down debt prevents them from saving enough for retirement. Of course, not all debt is due to a lifestyle change. But if your extra spending is on unnecessary purchases, lifestyle creep is likely the culprit.

It’s normal for your lifestyle expenses to increase when you get a better income. You want to treat yourself after working hard to earn that money. “Where it becomes problematic is when the increase in lifestyle outweighs the increase in income,” says Camua. “It then invades your ability to save for retirement, uses up your emergency fund, or increases debt.”

Lifestyle creep can happen to anyone – no one is immune. It doesn’t require you to make six figures, and you’re not off the hook for not buying a sports car. Lifestyle drift can affect daily wage earners as well as wealthier households. Anyone can be convinced that they need to eat out most nights because they don’t have time to cook or their new job requires them to buy a new office outfit every few days. weeks.

Lifestyle Creep Signs

  1. Your savings are stagnating. “If the amount you save has remained static even after a few years of raises and bonuses at work, that’s a sign that you’re spending all the extra money you earn each year,” says Aiken. Not prioritizing savings can be disastrous for your overall financial health.
  2. Your expenses have increased in many (or most) areas of your life. If you find yourself spending more money in general because you feel you can afford it, lifestyle change may be a factor. You can eat out more often, buy more expensive gifts, take more expensive vacations, and sign up for more new memberships.
  3. You don’t budget. It’s easy for lifestyle to take over when you don’t know where your money is going. If you don’t know how much money is being spent on extra expenses each month, you may be spending too much without even realizing it.
  4. You do not feel in control of your finances. Maybe you get stressed every time you check your bank account balance because you know you’ve overspent. Or you watch your dwindling savings or growing credit card balances with dread and regret. This feeling could tell you that your lifestyle is outpacing your income.

How to Prevent Lifestyle Creep

There are several strategies that experts recommend to prevent you from falling victim to an insidious lifestyle. First of all: make a budget. Reviewing your budget often can help ensure that your spending stays in line. “If you find yourself committing resources to, say, another car or a vacation home — likely a more extreme case of lifestyle slippage — confirm that it doesn’t derail your plan,” Camua says.

Also, secure emergency funds and retirement savings before anything else. “It is important to always ensure that any additional expense one makes to improve lifestyle occurs after ensuring that an emergency fund is established, savings for retirement are not reduced and consumer debt does not increase,” Camua said. Doing your best not to increase credit card or loan debt after a pay raise ensures that you don’t outweigh the benefits of the raise.

Once your savings are in order, the long-term consequences of overspending will be minimized. And Aiken recommends making saving as easy as possible. You can set up automatic transfers to your savings accounts that happen on payday so you don’t have time to spend the money.

And finally, don’t worry about infrequent little splurges. “Remember to allow yourself occasional indulgences,” Aiken says. Instead, focus on the big picture.

About Joan Dow

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