Over time, your lifestyle may have gradually improved because of changes in spending habits – subtle changes you might not even notice. “Lifestyle creep” can impede building long-term wealth.
What is lifestyle creep?
Also known as lifestyle inflation, lifestyle creep occurs when living expenses and non-essential personal expenditures grow relative to income.
When you get a nice raise at work, receive a large bonus payment or earn more salary through a promotion or job change, it’s rewarding from both a financial and emotional perspective. Not only have you added to your personal wealth, but you feel proud that your work accomplishments have been recognized.
Tempting as it might be to dramatically “upgrade” your lifestyle, it makes sense to be prudent and thoughtful about taking on additional discretionary expenses.
With lifestyle creep, activities or material items that you once viewed as luxuries when you had a lower income, are now more accessible and deemed essential. For instance, you now buy more lattes and premium coffee. Maybe you dine out more often and go to higher-end restaurants. You might buy more expensive clothes or splurge for top-of-the-line appliances. More dramatic examples include moving to a bigger home, buying a luxury vehicle or taking more vacations.
Over time, your lifestyle and standard of living creep up to levels you previously couldn’t maintain. A certain degree of lifestyle creep is essential and well deserved, as we all try to live our best standard of life for ourselves and our family. Lifestyle creep becomes an issue when it builds debt and jeopardizes our financial goals, including retirement.
Lifestyle creep may impact your financial goals
As the term suggests, lifestyle creep isn’t necessarily a single act of extreme extravagance or radical overnight change in how you live. You might start spending a little more at a time, gradually moving beyond your former lifestyle. Lifestyle creep is common for younger people who land a full-time job for the first time and suddenly have more disposable income available. It may be problematic as such spending changes can make it harder to meet financial goals like paying down student debt, purchasing a home or investing for the future through vehicles like the RRSP or TFSA.
Lifestyle creep is more visible among high-income earners and, if not managed effectively, could impact shorter-term goals, such as buying a home, saving for your children’s education, planning for retirement and saving for other financial goals.
Tips for curbing lifestyle creep
- Set financial goals. Your customized financial plan includes various financial objectives. Putting your kids through school, becoming mortgage free, buying a cottage and building an appropriate income stream for retirement are some examples. Committing to goals that are clearly defined and tailored to your specific needs is a good way to achieve them. I can help you set goals and implement a practical financial plan to keep you focused on those important goals.
- Create a budget. The best way to truly understand how you spend money is through a budget. Having a formal budget allows you to track your income and expenses. If you find that you’ve been spending considerable money on discretionary expenses, you can reprioritize and reduce your spending, which will help strengthen your overall financial position.
- Live within your means. The best way to achieve this is to determine how much discretionary money you can set aside per month, leveraging your monthly budget. Categorize all non-essential expenses, calculate a monthly average, and add it together to find your monthly discretionary income fund. This fund is based on what remains after your living expenses and after saving for your financial goals, allowing you to have some money for discretionary expenses while still living within your means.
- Be conscious of how you manage money. When you work hard to earn and save more money, you deserve to enjoy some of the nicer things life has to offer. Curbing lifestyle creep isn’t about denying yourself pleasure in life. It’s about achieving a good balance in your spending habits and mindfully distinguishing between your needs and wants. This approach will help you decide when it’s okay to spend and when you should save for your short-term and long-term goals.
Contact our office to learn more about how you can avoid lifestyle creep while working toward your financial objectives.