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The idea that everything creeps in unnoticed is enough to unsettle the bravest of us.
In the world of personal finance, it’s the subtle, creeping changes in spending habits that can be the most daunting. The phenomenon is known as lifestyle creep and is one of the biggest – and most overlooked – barriers to long-term wealth accumulation. However, once you know what to look for, there are strategies to keep the lifestyle far, far away.
“People struggle to negotiate pay or maximize their returns by just a few percentage points, but their lifestyle is killing a lot of people,” said Ami Shah, a certified financial planner in Washington, DC and CEO of Steward, a financial planning software tool .
What is lifestyle creep?
Often times, as income increases over the course of your career, so does expenses. More disposable income could mean signing up for a different streaming service or eating out more often. Or it could mean buying a second home or a new car.
This is where lifestyle cancer can set in, “when your expenses keep increasing in step with your income,” said Nilay Gandhi, CFP and Senior Wealth Advisor at Vanguard, in an email interview.
On the one hand, it is only natural to increase your expenses as your income increases. After all, we work hard to buy and do the things we love in life. When that higher spending is thoughtless rather than deliberate, it becomes problematic, says Mary Lyons, investment advisor and founder of Benchmark Income Group in Dallas.
Perhaps you are spending more to make your lifestyle match that of your friends and family, or because you feel like it is expected of you. You may even feel that by working so hard for it, you earned the right to spend more.
However, these thoughts and feelings can be signs that your higher spending is automatic rather than deliberate, Lyons says.
The story goes on
“I think there is something to be said for a life in design as opposed to living in standards,” says Lyons. “And if you allow lifestyle creep to get the better of it, you end up with a life behind bars.”
Lifestyle creep can happen to anyone, regardless of income. Shah says when her organization asked high earners (with salaries between $ 100,000 and $ 500,000) to identify their greatest financial challenge, nearly half said they were unable to save enough.
This underscores an important fact: there is no such thing as an above-average lifestyle.
Why is the lifestyle destructive?
One of the most damaging side effects of lifestyle creep is that spending more money inevitably means saving and investing less. This problem is particularly acute for younger savers, who can benefit most from an early investment.
With compounding, even small investments have the potential to grow significantly over a sufficiently long period of time, said Gandhi, who is based in Malvern, Pennsylvania. But if your expenses keep growing with your income, there is nothing left to invest.
For older investors planning their retirement about five to ten years away, lifestyle creep poses a different danger. These savers are typically at the peak of their careers in terms of salaries and bonuses, often spending more generously on luxury items like houses and cars.
However, if they earn such a high salary for just a short period of time, their savings may not be enough to continue this lifestyle into retirement.
“This either forces them to work longer hours or to cut expenses in retirement – and either option can be tough to take,” Gandhi said.
Lifestyle creep can also add to life stress, says Shah. For example, if your lifestyle becomes dependent on a certain income, what if you want to change jobs or careers?
“I’ve seen way too many people get stuck in a job they hate because of it,” says Shah.
How to prevent lifestyle creep
There are several ways to keep the lifestyle in check, but Shah, Gandhi, and Lyons all agree that the best place to start is by creating a financial plan and budget and sticking to both.
For Shah, the first line of defense is not spending too much on housing, often the highest spending on someone. In general, she suggests clients keep housing costs below 25% of their net income. And if the amount they save goes below 20% of their net income, this could be a lifestyle creep.
Lyons suggests paying yourself a weekly allowance to be conscious of your spending regardless of how much money you make. She recommends that her customers – even those who earn more than $ 1 million a year – set up programs to automatically pay their essential expenses. And with what remains, they decide on an appropriate budget weekly instead of monthly.
“And what that does is really get rid of the pulse outputs,” she says.
For example, if you run out of money on Thursday and your pocket money comes on Friday, it’s easy to postpone a purchase. However, when you have to wait two weeks for a paycheck, it is far more tempting to calculate it and pay it off later.
Earning a raise is a great opportunity to stave off lifestyle creeps, Gandhi said.
He recommended putting a percentage of the raise – 75% is a good rule of thumb, he said – in a pot that will help you meet your financial goals, whether it’s retiring, investing in stocks, saving for a down payment, or Pay off debt . Then whatever is left can be used as you wish.
“That approach still allows you to get instant gratification from every raise,” he said. “You have 25% to allocate your budget however you want while you make sure that 75% is aligned with your goals.”
This is one of the best ways for anyone to prepare for financial success while avoiding the subtle but destructive march of lifestyle.
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Chris Davis writes for NerdWallet. Email: cdavis@nerdwallet.com.
Lifestyle Creep: Eroding Your Savings, One Raise at a Time originally appeared on NerdWallet.
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