How to Avoid Lifestyle Creep (Even When Going Through a Promotion/Getting Stock Awards)

So many people get caught up in dreaming of “more.” More money, time, friends, experiences, etc. But what happens when “more” starts to become a reality?  Should you find yourself in a situation where you received a raise or other...

So many people get caught up in dreaming of “more.” More money, time, friends, experiences, etc. But what happens when “more” starts to become a reality? 

Should you find yourself in a situation where you received a raise or other form of windfall, there’s something that can piggyback off of it – lifestyle creep. 

Lifestyle creep can harm your financial plan, so how can you avoid it? We’ve compiled tips to help you identify lifestyle creep and how to avoid it. 

What is Lifestyle Creep?

Lifestyle creep or lifestyle creep is when your living expenses and non-essential costs grow as your income grows. 

This is most visible among high earners. For example, after a raise, buying a brand new car, a large home, designer items, etc. But it could also be as simple and sneaky as eating out at a restaurant one more time per week after receiving a raise. These things add up over time!

Why is Lifestyle Creep Harmful?

We’re not saying you shouldn’t eat out, have nice vehicles, or a custom-made home because viewing money as a scarce resource can also be detrimental in its own way. 

Lifestyle creep becomes harmful when it cuts into your financial plan and savings goals like your retirement savings, emergency fund, other investments, etc.  

How Do I Know If I’m Experiencing Lifestyle Creep?

A key sign that lifestyle creep is starting to take hold is if you find yourself thinking:

“How did I ever make less?”.

It’s natural for your expenses to follow the growth of your income. Let’s say you’ve been driving a car on the verge of quitting; purchasing a newer vehicle if your income increases make sense. 

The fine line lies between what you NEED to upgrade vs. what you upgrade because you CAN. Too many “can” upgrades could stand in the way of building long-term wealth with your new increase in income. 

How To Avoid Lifestyle Creep

It’s natural for humans to be entranced by new “shiny” things, but it’s essential to differentiate between needs and wants. How do you do that? By practicing intentional spending. 

Intentional Spending

Spending is one of the biggest determinants of a financial plan’s success. Most people have experienced a dreaded “impulse buy” because it’s human! It could be from grocery shopping when hungry and thus picking out a dessert that wasn’t on your list or waiting in line at the department store and letting your eye wander to the little trinkets lined up by the checkout. Don’t be too hard on yourself; it happens!

Intentional spending is just the opposite of grabbing goodies at the checkout counter. Intentional spending encourages you to reflect on what this purchase means for you and your financial goals in the long term. 

When considering a more significant purchase, ask yourself these questions:

  • Does this purchase align with my values?
  • Is this purchase helping me achieve a financial priority or hindering me? 
  • Will using these funds push me towards achieving my goals or away?

Start by tackling your financial priorities, then see what else you can use the funds for to better your lifestyle or push you towards other goals. 

For example, you received a raise that gives you an extra $10,000 yearly after deducting taxes. 

You have the following financial goals that haven’t been met:

  • Maintain an emergency fund of at least $5,000 (your current balance is $3,000)
  • Pay off $10,000 of credit card debt (you have $2,000 left)

Start by allocating your extra funds to achieve your short-term financial goals. After those have been met, you can decide what to do with the remaining $5,000. 

  • Do you want to return to school to achieve a higher degree? 
  • Do you want to make home renovations? 
  • Do you want to take your family on vacation? 

You place value on quality family time and lifelong learning. Based on that, your values guide you towards taking a few college courses and taking your family on a week-long vacation. 

Let’s look at another example of how intentional spending can impact your finances long-term. 

I’ve worked with a couple who had $10 million dollars in assets, which to most people is a lot of money! 

They were in their 50s at the time, and for the previous few years spent an average of $850,000 per year.  

Even though they had a large sum of money, our financial planning projections showed them running out of money in their early 80s, just when many people start needing to draw more money from their portfolios for health-related expenses, etc.  

The moral of the story? Spending and lifestyle creep have a large impact on a financial plan if gone unchecked.

By intentionally using your new funds, you can feel confident that you’re achieving your financial goals, increasing your quality of life, and helping your finances last for long-term use.

Other Considerations

We can’t forget about taxes! Has your wage increase bumped you into a higher tax bracket? If so, ensure you account for a higher tax bill. 

A financial advisor can help you with tax planning or introduce other solutions to a higher tax bill, like tax loss harvesting, income deferral, income acceleration, etc. 
If you’ve received a raise, are worried about lifestyle creep, or are looking for guidance on intentional spending, we can help! Please reach out to us today to start creating a financial plan customized to your values and goals so you can feel confident that your money is working for you.