UPDATED: April 21, 2022
You've worked hard for months, and finally, you're getting a well-deserved raise. First, you're going to treat your spouse to a nice dinner, then maybe get the kids that toy they've been eyeing. You've been thinking about that new car for a while, and the payment is only $200 more a month, which of course you can afford now.
Suddenly, before you even see your paycheck, you've already spent the raise and then some. Say hello to "lifestyle creep" also known as Keeping Up With the Jones’.
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Expenses Creep Higher with More Income
Lifestyle creep, also known as lifestyle inflation, is the phenomenon where people tend to spend more money as they earn it. It's how we end up earning larger salaries, living in bigger homes, driving nicer cars, and eating in fancier restaurants, but with no more money in savings or retirement.
If left unchecked, lifestyle creep can actually put you in more debt the more you earn. But rest assured, you can combat lifestyle inflation. Below are seven easy ways to shift your mindset and ultimately avoid lifestyle creep.
Create a Plan Before You Need It
The best time to create a plan for future increases in income is before the money arrives. Once that money is available, it's incredibly easy for it to burn a hole in your pocket, and it's gone before you know it.
Here are some tips for how to allocate additional income:
- Pay off debt - If you have a sizable debt-to-income ratio, or if you're deep in high-interest consumer debt like credit cards, choosing to send the entire amount of your raise straight to debt payments can be a great idea. An extra few hundred or thousand dollars per month can be just the thing you need to move the needle on your debt repayment strategy.
- Allocate percentages - You may decide to put 50% of your raise towards emergency savings, 30% into your 401K, and 20% into your monthly cash fund as a reward for a job well done. Deciding on specific percentages that work towards your broader financial goals can act as guardrails to apply to present and future increases. Next time an increase comes, you'll know where it's going without a second thought.
- Increase retirement savings - You'll be able to get a lot of bang for your buck by sending your raise straight to a pre-tax retirement account if that's an option in your organization. Since you're already living off your current income, you won't miss the money, and it could be the difference in creating a favorable retirement plan.
Whichever you decide, make sure there's a course of action before the money is absorbed into paying for increased expenses.
Pay Yourself First
It's up to you to look out for your financial future by making payments to the "Bank of You" before anyone else gets paid. To avoid lifestyle creep, take money for savings and investments off the top of your paycheck and make sure those happen first.
Once you've paid yourself and all of your required monthly expenses, you can work from an anti-budget and spend the remaining amount leftover. One way to make paying yourself first simple is by making it automatic.
Automation is Key
If you fail to automate savings, you're relying on your limited supply of willpower to move money where it needs to go. Whether you're automating an increased contribution to your 401K through work or automating a transfer to savings when your paycheck hits, performing these transactions behind the scenes in advance is a guaranteed way to make sure they happen.
Because You Can, Doesn’t Mean You Should
Many people get caught up in the mentality of spending more simply because they can afford it. But just because you can afford to buy something new doesn't necessarily mean that you should. And by spending on frivolous items and neglecting savings, you'll only put yourself in a bad spot down the line.
You may find it beneficial to create a budget or spending plan. This gives you the room to allocate a bit of your raise towards "fun money" while still making responsible decisions like increasing your personal savings rate.
Create Savings Goals
If you've never taken time to consider how much you should be saving for retirement, a raise is an ideal time to do so. The general recommendation is to save 15% of income towards retirement. If you can automatically funnel off a part of your raise to a 401K or employer-sponsored savings account, you'll be benefiting your future self without feeling the impacts of it now. Long-term investing is a great way to avoid lifestyle creep.
Savings goals aren't only applicable to retirement. Remember that you can create a savings goal for a vacation fund, wedding fund, or shopping spree. Simply having an amount to set aside each month can keep you from squandering away purchases on pointless junk in favor of your larger goal.
Stick to the Plan
Sometimes a pay increase may be larger than anticipated. And it can be tempting to scrape some money off the top to use for that new TV you've been drooling over for months. But the critical component of your plan is sticking to it, no matter how much or how little an increase might be. Otherwise, you're inviting lifestyle creep in, and once she gets comfortable, it's tough to get her to leave.
Keep Reasonable Company
It's easier to put the notion of Keeping Up With the Jones' out of your mind if the Jones' don't live next door. Always surrounding yourself with big spenders and high rollers will do no more than create envy that eventually leads to your expenses increasing alongside theirs.
Take time to understand what you enjoy. And if the answer is lavish vacations and fancy cars, that's okay. But be reasonable and make cuts elsewhere in your life to make sure it doesn't overtake the majority of your expenditures.
The only definitive way to avoid lifestyle creep is to create a plan and set it in motion before receiving a pay increase. Failure to do so means you're leaving open the opportunity to spend more on material items instead of making meaningful financial strides towards an independent future.