As people start making more money, their spending tends to change, often without even noticing. Known as lifestyle creep, this phenomenon occurs where higher income leads to spending more on things that aren’t practically necessary instead of saving or investing, in the opinion of Scott Tominaga. While it might seem like a nice treat after working hard, it can devastatingly hurt one’s long-term financial stability and goals. Knowing about the drawbacks of lifestyle creep is the first step to taking control and protecting one’s financial future.
What Exactly Is Lifestyle Creep?
Lifestyle creep takes place slowly. A promotion in a job, an increment, or a job change may prompt someone to go for premium clothes, eat out more often, or rent a more expensive house. While none of these choices are inherently bad, there is a problem when spending rises with income, leaving no space in mind for saving or investing more.
The threat of lifestyle creep is that it’s tricky, as per Scott Tominaga. It usually seems to be justified for someone who is working hard, making them feel that they “deserve” a better lifestyle for their effort. But before long, those small adjustments can quickly snowball into greater fixed costs while offering less flexibility in the case of an emergency, like a job loss.
The Impact of Lifestyle Creep
Lifestyle creep doesn’t just mess monthly budget of individuals; it can take a major toll on their financial health in the long run. Here are some examples of how hidden costs affect:
- Less Savings: When spending goes up, saving for retirement or emergencies can take a hit.
- Delayed Financial Freedom: People who start spending most of their income might end up working longer and not be ready for early retirement or job changes.
- More Financial Stress: Unfortunately, even when income rises, those who become victim of lifestyle creep can feel more financial pressure because of their bigger bills.
- Lost Investment Opportunities: Money spent on quick lifestyle upgrades can mean less cash for investments, which could cost a lot in the long run due to missed compound interest.
- Falling into a Debt-trap: Lifestyle creep, leading to living beyond one’s means, can tempt them to frequent use of credit cards, eventually making them fall into a debt-trap.
How to Manage Lifestyle Creep
Thankfully, lifestyle creep can be controlled, which requires thoughtful financial planning and self-discipline.
- Establish and Review Budget: A realistic, clear budget will keep expenses in line. Segment needs, wants, and savings, and have savings objectives regarded as non-negotiable expenditures.
- Automate Savings: By adopting automatic transfers into savings and investment accounts, individuals can “pay themselves first” and eliminate the temptation to use excess funds.
- Set Financial Goals: Steady life goals, such as purchasing a home, retiring early, or establishing an emergency fund, can help keep spending goal-oriented and meaningful.
- Embrace Mindful Spending: Before spending big, individuals should ask themselves if the cost is worth looking at their life goals and objectives.
- Sustain Lifestyle Lag: Rather than upgrading to a new lifestyle right away after a raise, stick with the earlier lifestyle for some time. This builds a cushion to save and invest.
Lifestyle creep isn’t all bad. While making more money, instead of treating or rewarding for hard work, keep on spending and make smart choices to consolidate a solid financial life, and a gratifying retirement.
