Financial Planning, Millennials

Beware of Lifestyle Creep

Have you ever caught yourself using “When …Then” statements when talking about your finances? If you have, you are not alone. It’s so easy to get caught in this trap. One thing I hear all the time when talking to people is phrases like “When my income goes up, I will start saving” or “When my kids are out of the house, I will start planning for retirement.” The harsh reality is that these statements almost never end up being true. They are just excuses.

You gradually start to spend more as wages go up. It’s just how life goes. We start living in a more upscale neighborhood, going to more expensive restaurants, and buying ‘name brand’ things. Before long, you have a house that is too big, a car that is unnecessarily fancy, and excess clothes you never wear. This is known as lifestyle creep, it is so common but extremely detrimental.

The hard part about lifestyle creep is that it happens slowly, making it hard to notice. Gradually, it sneaks up on you and before long you are playing a game of catch-up that is hard to win. And I know what you are thinking. “I am not most people! I will actually start to save when I have more income. I just can’t yet.” We all want to believe we aren’t most people, so don’t be. Stop making excuses and start building your financial future today.

Here are a few tips to help you not become “most people”

  1. Create good habits at an early age
    • Start using a budget to understand where your dollars are going and make sure you build savings in now. Even if it just a small amount, getting in the habit can help tremendously in the future.
  2. Save based on percentages
    • Allocate a certain percentage to savings. For example, save 20% between your 401(k), emergency savings, and ROTH IRA. This way as your income goes up so does the dollar amounts you’re saving.
  3. Plan for wage increases and bonuses
    • Understand that bonuses, tax refunds, and salary increases will happen and plan for them. Knowing you get an average bonus of say $10,000 a year is helpful. You can determine ahead of time to save 75% of that and then use 25% to buy a few things on your wants list or to go on a fun vacation with family or friends.

The truth of the matter is that lifestyle creep happens, and if you do not plan for it, it will probably happen to you. Remember, some life style creep is okay, but not at the expense of failing to plan for your future. Focus on creating good habits now so in 10 years you don’t have to look back and say “I wish I would have started sooner!”