What is Lifestyle Creep?
Lifestyle creep, or lifestyle inflation, is the term we use when someone increases their spending as their income rises. Oftentimes resulting in an increased “lifestyle” but a stagnant Net Worth.
All of us have either seen lifestyle creep or experienced it first hand. We or someone we know got a raise only to immediately spend it all on a new car, clothes, travel or something similar. That’s what the money’s for right? You can’t take it with you!
While being able to afford nice things is a big motivation for working hard and earning a higher income. It is important to be mindful of your spending and ensure that your financial habits align with your long term financial goals.
If you make good money and you feel like you should have more to show for it, then you may be experiencing lifestyle creep.
What are Golden Handcuffs?
Golden Handcuffs are akin to Lifestyle Creep, only slightly different. Both can prevent you from reaching Financial Freedom. The term “Golden Handcuffs” is used to describe the substantial financial obligations that are often tied to highly prestigious careers.
Golden Handcuffs lie somewhere between “keeping up with the joneses” and lifestyle creep. It can best be described as the luxury lifestyle that is expected of someone who has a high paying job.
The nice car you expect the surgeon to drive, the Rolex a lawyer should wear or the fancy house befitting of a CEO. When individuals fall victim to the social expectations of maintaining a certain lifestyle – they might find themselves financially stuck and struggle to build wealth.
If you have Golden Handcuffs, they can keep you in a cycle that looks something like this…
Instead of your higher income being put to work and increasing your Net Wealth, society says “treat yourself” – so you upgrade your car and buy expensive, luxury items. When the bills come in you feel financially spread thin. So to pay for it all you now need to work even harder and make even more money. Again, the additional income could be used wisely to pay off the debts that came with an inflated lifestyle. But unless the habits are disrupted and patterns corrected, the extra money is quickly used to cover high payments for the luxury car you financed, etc. Leaving your Net Worth stagnant. Even worse, you use the extra money to justify taking on additional financial obligation. The cycle continues.
This makes you a prisoner to your work, unable to step away and take time to enjoy the fruits of your labor. You feel like you cannot afford to take vacations, instead need to be at work even more to pay all the bills. Much less save any money for the future. You find yourself stuck in a prison of your own making.
Is Lifestyle Creep Really That Bad?
Without an intentional financial strategy, lifestyle creep can chew right through the raise that came with your big promotion. It leaves you unable to take critical steps that are a part of every good financial plan. Most importantly lifestyle creep prevents you from increasing contributions to your savings, and retirement accounts – much less other investments.
In addition, Lifestyle Creep is a sign of unhealthy money habits and the need for improvement with how you manage your money. If you’re not careful and do not take action to correct bad money habits, lifestyle creep can lead to overspending, expensive debt, and damaging your Net Worth even further.
While there is nothing inherently wrong with improving your lifestyle as your income increases…(You’ve worked hard to get where you are with your career and for the higher income that comes along with it!) You must also be diligent and thoughtful of how your financial decisions impact your future. With every increase in your income, it is important to be mindful of how you use your money.
Now that you understand what Lifestyle Creep and Golden Handcuffs are – what are the signs?
The Signs of Lifestyle Creep
The key to ensuring that you don’t fall victim to lifestyle creep is knowing how to identify the signs and symptoms.
Not Tracking Your Spending
If you’re not keeping track of where your money is going each month, it is easy for lifestyle creep to, well – creep in. If you do not monitor how much you actually spend each month, additional spending will go unnoticed. Failing to track your spending is one of the biggest money mistakes we see. It makes it impossible to align your spending with your values and quickly leads to overspending and debt.
One of the most obvious signs of lifestyle creep is an increase in spending. Shopping more often than usual, buying more expensive items or spending money on items that you don’t necessarily need – are all signs of lifestyle creep.
Living Beyond Your Means
Another sign of lifestyle creep is living beyond your means. Without mindful money habits, lifestyle creep can easily get out of hand and lead to spending more money than you make. Early signs are carrying a balance on your credit card to pay for purchases that you can’t afford with cash. Extreme examples are taking out large amounts of debt to finance luxury items, such as cars or Peloton, that overextend you financially.
Ignoring Your Savings Goals
Lifestyle creep is all about spending money – and the opposite of that is saving. So it is not uncommon to start ignoring the savings goals you set for yourself. Acting in favor of immediate gratification, you neglect saving for retirement. Opting instead for shopping, expensive meals, etc.
Increased Total Debt
This is the worst case scenario. Increased total debt happens when your spending has increased so much that it outpaced any increases in your income. If you received a promotion with a raise, or took a higher paying job, but your debt continues to accumulate – you are probably experiencing lifestyle creep.
How to Avoid Lifestyle Creep & Golden Handcuffs
Now that you know the symptoms of Lifestyle Creep, it is important to know what steps you can take to avoid it in the first place! If you’re already struggling with lifestyle creep, these steps can help you too! Take the following advice to break the cycle and start to make immediate improvements with your spending habits.
Set Financial Goals
Setting goals helps you prioritize your spending, build long-term focus and secure your financial future. Make sure you set goals that are effective – we suggest making S.M.A.R.T. Financial Goals. Create a Vision Board for your Financial Goals to visualize what you’re working towards. This makes it easier to stick to your plan, not overspend and make consistent progress.
Save a Percent of your Income
Reaching financial goals and avoiding lifestyle creep is even easier to achieve if you set your goals based on percentages instead of dollar amounts. For example: Shelly commits to saving 10% of her income while making $60,000/year. She then gets a raise to $70,000. To avoid lifestyle creep she leaves the percentage as is and puts more money toward her goal.
Use a Budget
Using a budget is one of the best ways to keep your finances in check and avoid lifestyle creep. When used properly a budget doesn’t just tell you how much you can spend. A budget helps you ensure that you know where your money is going and that it aligns with your goals.
But you also need to budget for the fun things! Giving yourself permission to spend money on nights out with friends and weekend getaways. All within the constraints of your income to avoid spending more than you make and getting into expensive debt. A budget also helps you make informed financial decisions when you do want to spend a little extra on something special. The key is to learn exactly how to make a budget that actually works – we’ve got you covered in this course.
But notice we said “use” a budget – not just make one. That leads us to our next point…
Track Your Spending
A budget is useless without tracking your daily spending and monthly expenses. Tracking provides you with incredible insight on your actual money habits. You’ll see exactly where your money goes and how much you’re spending each month. With that information you can decide if you need to make any changes to how you are using your money.
Self-Control is one of the most important mental habits and characteristics of financially successful people. Saying “no” to things outside of your budget is critical to your success. This is why we suggest taking time to think before completing a purchase (delaying the gratification).
Take some time to think about if a purchase is a need, or a want. If you still want or need the item, review your budget and financial plan to make sure that you can afford it. If you cannot afford it using cash on hand? Do you need it immediately? If at all possible, create a plan to save up the money so that you can pay cash and will avoid accruing expensive debt.
Be Mindful of Your Spending Habits
Avoiding lifestyle creep requires self-awareness and acting with intention. Take the time to ask yourself if what you’re spending money on is a need, or a want. Use your budget to make informed spending decisions. Pause and think if what you’re buying will actually add value to your life, or if it’s a result of pressure from outside influences. These are all examples of being mindful with your money and simply observing your actions so that you can use your money intentionally and in alignment with your goals.
Don’t Keep up With The Joneses
Finally, don’t get caught trying to keep up with the Joneses. Just because someone else has something doesn’t mean that you need it too! Or that what they have, actually makes them happy. Try not to compare yourself with others and focus instead on what makes you happy without breaking the bank. Remember that your financial security is more important than maintaining a certain “lifestyle” or “appearance”. So don’t let lifestyle creep take over!
Not only will these habits help you avoid the trap of lifestyle creep, they will also help you improve your overall financial wellbeing and assist you on your journey to Financial Freedom.