If you're not careful, lifestyle creep can sneak up on you and ruin your financial house before you realize what's happened.
One of the most common and insidious causes for debt is what’s commonly called “lifestyle creep”. Lifestyle creep occurs when your spending rises to match or exceed your income. I personally think this happens to everyone at some point in their life. It’s human nature. There’s a certain psychological euphoria that comes from making money, and when we make more of it we tend to celebrate more than we should.
I myself became a victim of lifestyle creep. Whenever I received a raise at work, I’d spend it. I didn’t even spend it on anything lavish. I bought way too much car when I landed my first job, so a lot of my future income after that was spent on paying off that car. Other than that I just spent a little here, and a little there. I ate and drank my fair share of it, and went out to the movies a lot. I spent a small fortune over the years on computer games and the fastest computers to run them. I bought books new and never even read them! (I thought libraries are for old people and college students). Stupid stuff, really.
Lifestyle creep is a drain on the young, but it can be devastating to the old. Lifestyle creep robbed me of my future income because I not only bought more car than I should have, but I probably spent $5 for every one I earned in a raise through the use of credit. See, earning a raise made me feel like I was always going to have more money tomorrow than today, so why save anything? Eventually, my income started to grow more slowly and I couldn’t keep up with my spending. That led to my financial tipping point and I realized something had to change.
But for people 5-10 years from retirement, lifestyle creep can really set them back. I still have time to save more, but a person who is 10 years from retirement and upgrades his car, buys a vacation home or spends his money on all the trappings of the midlife crisis is up against a wall when retirement comes. These people are typically at their peak earning years and when those years coincide with their peak spending years, they set themselves up for a lifestyle that’s impossible to maintain on a fixed income.
How to avoid lifestyle creep
The reason lifestyle creep is so prevalent and so dangerous is that it really does creep up on you. It starts with $50 here, and $25 there and before you know it you’re spending hundreds or even thousands of dollars on completely random things. And the higher your income, the faster it happens and further in debt you go. Look at the pantheon of bankrupt celebrities.
Admission is the first step to reform. The second is changing your behavior to avoid falling into the trap further. Here’s what you can do:
Shopping.
Laura Rowley shares these shopping tips from her blog at MoneyandHappiness.com:
Ask yourself if you’re spending enough on the necessities (beyond food and shelter), namely; retirement, paying down debt, college savings (probably in that order). If you’re not, then you should put that money toward those things first.
Ask yourself if you have enough cash set aside for any maintenance costs coming up. If your car needs new tires in the next couple of months, you shouldn’t be spending the money on a new computer or game system like I did.
Ask yourself if you would feel better buying an experience and creating memories instead of buying some new “thing”. Would you rather take a trip on a long weekend with your spouse than have the latest iGadget from Apple?
Save before you buy. Don’t use credit unless you pay it off at the end of the month – and even then make sure you’ve saved up for the item first.
Handling that raise.
When you get a raise, pretend that you didn’t. I know, what’s the point of the raise if you can’t enjoy it? But it will pay off in the end – trust me. Here’s what I do:
Take 80-90% of your raise and deposit it each month to your savings account – automatically. That last bit is the key. It must be automatic, or you won’t do it and the lifestyle creep will sneak up on you again. By keeping that 10-20% of your raise, you still get to enjoying spending some of it but you won’t be living at the expense of your future. You could also wait until the second month to do this and spend the entire raise from the first month as a treat. I think that’s a good compromise.
Live like a college student for 5 years after you graduate.
No, seriously. It will pay off huge dividends in the end. College students are used to living on next to nothing, so it’s not a big lifestyle change to continue doing so after college. But doing so will allow you to avoid falling prey to spending that fat new paycheck when you finally get your first real job. It also means that you can save that new income and have it at the ready for a new house or wedding when you reach that point in your life.
The bottom line is simple - live below your means.
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By living like college students, my DH and I have bought our first home, a duplex, and in .5-1.5 from now will be able to buy another to rent out fully. By doing these things it is allowing us to pay down debt and invest on a low income.
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