Lifestyle creep happens when increased income leads to increased discretionary spending. It is one of the primary reasons some people are unable to build the wealth they desire. When our income increases, we feel we should reward ourselves for our effort. Unfortunately, that reward is usually spending excess money on things that do not get us closer to our financial goals. While my income has quadrupled in the past 6/7 years, I have managed to avoid lifestyle creep. Here are the most effective ways to prevent lifestyle creep.
Automate Your Savings
The easiest and most simple way to avoid lifestyle creep is to automate your savings. If you’ve been reading my weekly blogs, by now you have a personal savings goal. Well with each pay increase, your savings goal should also be increasing. Personally, I strive to save between 30% – 35% of my net income (income after taxes and benefits). An advantage to having your savings goal be a percentage of your income is the amount you save will automatically increase when your salary increases. Once you know your new savings amount, establish automatic monthly withdrawals. By having your savings automated you won’t be tempted to spend more than you budgeted on things that you impulsively want to purchase. The money will be removed from your account. Then you can carry on living your life as if it was not even there.
Automating your savings does not require as much discipline as some people think. It’s similar to automating your bill payments. You don’t even think about it until you notice the withdrawal from your account. And since your savings is automated you know whatever remains in your account is what you’ll have to spend until your next paycheck.
Increase Your Retirement Contribution
Another effective way to prevent lifestyle creep is to increase your retirement contributions. The recommended IRA contribution is 15% of your gross salary. However, usually when people are just starting out in their careers they do not contribute this much. Instead, their salary is used to get their lives started. This could be moving out of their parent’s home or paying off debts. The best way to achieve the 15% contribution recommendation is to increase your IRA contributions over time. Therefore, whenever your salary increases you should be increasing your IRA contribution also. Remember one of the biggest financial hardships millennials will face in our lifetime is how to fund our retirement. CLICK HERE to fund out more about your IRA saving options.
Investing is one of the best ways to increase your wealth and prevent lifestyle creep. After you’ve saved your emergency fund, your excess cash should be used for investing. When you finally get that pay increase, consider how much of it you’re going to invest to build your wealth before you think of purchasing anything else. By prioritizing investing, you can keep lifestyle creep at bay by allocating a portion of your increase to something other than excess consumption. After you’ve purchased your investments, then you’re free to spend any discretionary income on nick knacks that you enjoy. Remember, the aim is not to be so restrictive that you do not enjoy your salary increase. The aim is to ensure that a portion of that increase goes towards ensuring you can enjoy your future also. CLICK HERE to learn more about investing!
Stick To Your Budget
To most people budgeting is one of those mentally draining tasks that brings very little satisfaction. However, if you want to prevent lifestyle creep, budgeting is one of the most effective ways to prevent it. A budget lowers the likelihood that you will go out and spend excessively. People who have a home budget have a goal that they are trying to achieve. As a result, they are more likely to save more when they earn more as this will get them closer to achieving their goal. Budgeting is one of the most effective ways to prevent lifestyle creep. If you don’t have one already, here’s a great blog on how to start your own home budget [CLICK HERE].
Allow Small Treats
The ultimate goal is to gain financial independence and security. However, it is important to remember to take care of ourselves while working on this. When your income increases you can also increase your quality of life. Buy more fresh fruits and less high sodium canned products. Perhaps get better insurance so that you can go to therapy, get necessary orthodontal work done or simply access to better healthcare overall. If you want to upgrade your image, buy higher quality clothes or get membership to a better gym. You have put in the work to earn that income increase and you should enjoy the fruits of your reward. Always keep in mind however the ultimate goal of financial independence and security when you do this. Moderation will ensure that you can enjoy now, while putting money away to also ensure you enjoy your future.
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