Financial Planning

Combat Lifestyle Creep with Savings Creep.

Between a doctor and a school teacher, who would you expect to have more income left over for savings at the end of each month? In an alarming number of cases, they both have the same amount of money remaining: zero.

Be the small boat.

Many individuals fall into a trap where, no matter how much their income increases, they never save a meaningful amount of money for the future. This is known as “lifestyle creep.” It occurs when individuals increase their standard of living as their income rises. What would normally be discretionary income, is now spent servicing the expenses related to a more luxurious lifestyle.

Lifestyle creep happens gradually. As your pay increases, your expenses gradually increase with it. It could be small things, like eating out more or adding a lawn service, to bigger things, like trading up to luxury cars or moving into bigger houses.

Lifestyle creep is a compounding problem. Not only is more cash flow being diverted away from saving for retirement, but retirement itself becomes more expensive. Once a person or family is accustomed to living at a certain standard of living, it is very difficult to go backwards. They will expect to maintain that lifestyle in retirement, which will mean more money must be saved. 

How can you avoid falling into the trap of lifestyle creep? Let your savings creep faster than your lifestyle.

The earlier you are in your career, the better positioned you are to prevent lifestyle creep. Typically, pay increases as people progress in their career. You can stop lifestyle creep early in your career by diverting pay raises to savings. Whenever you get a raise, place that money into savings before you have the chance to spend it. This can be accomplished by increasing your 401(k) contributions or setting an automated transfer to savings at your bank for the day after your pay deposits. This way, you won’t “feel” like you are earning more money, yet your savings rate will increase.

What if lifestyle creep has already set? You can still battle it with savings creep. Pick an amount that you can comfortably save, and try to increase it every month. If you are serious about meeting your savings goal, you will find yourself cutting back on superfluous expenses. This could be simple, such as eating out less or canceling premium cable channels. Bigger steps could be trading out of luxury cars or downsizing your home.

Most importantly, remember to strike a balance. It is important to enjoy life today and not divert everything to retirement. However, preventing lifestyle creep affords you the flexibility to experience more financial freedom.