As you get older, you may find that you have more money left over at the end of the month after paying for your essentials. From getting that big raise or end-of-year bonus to creating additional streams of income from part-time gigs or investments, extra income can be like a double-edged sword: it’s great to increase your earning potential, but it can be tempting to accelerate your standard of living more quickly and aggressively than is financially healthy.
The tendency to start spending more money than you need to once you start making more money is called “lifestyle creep”, and it’s very common at a couple of life stages: young professionals who have a salary for the first time, and mid-career professionals who have just accomplished some major career goals. Let’s review some strategies to nip lifestyle creep in the bud and keep you on track with your financial plans.
Track your daily expenses for three months
You might rationalize day-to-day expenses in the moment (“I deserve this!”). But the numbers don’t lie. Track the necessary evidence for you to have an honest conversation with yourself about your finances. By looking at three months of daily data, you’ll have a more comprehensive view and average out special circumstances, such as gift purchases or vacation expenses.
A simple Excel file or Google Sheet can help do the trick. The key is keeping track of every single expense, no matter whether it’s paid with cash or credit. When you don’t have a computer or smartphone in front of you, just keep a paper receipt or make a quick note by hand. Additionally, there are tools that can help with this process, such as Credit Karma and Rocket Money, which log expenses and (in most cases) catalogue them automatically. That way, you can slice and dice data to see trends in specific categories.
Tabulate totals at the end of three months and spot instances of “lifestyle inflation”
At the end of three months of tracking daily data, tabulate repeating expenses to identify expenses that are quietly getting out of control without you even noticing.
Let’s use lunch as a concrete example. Before you got that big raise, you may have brought a homemade lunch every single day. Now that you’re making more money, you feel that you have earned the right to grab your daily lunch from a nearby deli or restaurant. In this hypothetical scenario, you spend $15 per day for lunch. While this may not sound like much, this adds up to:
$75 every week
$300 every four weeks
$3,900 every year (52 weeks)
It can be difficult to know how much is too much, given that there’s a lot of variance in terms of how much you can spend, and it’s not something you can cut out altogether. However, tracking your quarterly spending can help you wrap your head around the realities of eating out frequently. For your specific budget, find a target number that’s realistic for your unique financial situation and set it as an annual budget limit for lunch outings. Think of it as a prepaid debit card: every time you eat out, deduct from that balance.
Understand the difference between wants and needs
Go through your list of expenses and identify other lifestyle creep instances. There are ways in which it’s easy to purchase slightly better and more expensive versions of what you had (or didn’t have at all) before, or exchange money for convenience: daily coffee, Uber rides, or monthly golf get-togethers can all be very tempting. But think hard about what brings you true enjoyment and value, and whether using that money elsewhere may be more fruitful.
Consider setting up an emergency fund
Once you start identifying opportunities for saving, you may want to set aside some additional funds. It can be a very rewarding feeling to know you have more money to invest in your future just by making a few lifestyle adjustments, and if you “hide” it somewhere with a designated purpose, you’ll likely be less tempted to spend it impulsively on daily purchases.
Redirecting money to an emergency fund can help build a foundation to weather unexpected expenses. Consider an emergency fund a de facto savings account that contains money you’ve set aside to cover unexpected life events, like a job loss, medical emergency, or car repair. While exact amounts will vary based on your situation, it’s generally recommended to set aside the equivalent of 3 to 6 months' of living expenses into an emergency fund.
With a solid emergency fund, you can reduce the decision of having to choose between short-term emergency expenses and making progress on your long-term financial goals. For example, let’s say you need to replace the water heater in your home or the timing belt on your vehicle. Having an emergency fund to draw from makes it so you won’t have to refrain from contributing to your retirement account to address these situations.
Consider increasing contributions to your retirement accounts
As mentioned above, contributing to your retirement account is a key element of any personal finance plan. By automatically making pre-tax deferrals to an employer-sponsored 401(k), you’re not only effectively reducing your taxable income for the current year, but also delaying applicable income taxes until retirement when you’re more likely to be in a lower tax bracket.
If you have legroom in your monthly budget through the elimination or partial reduction of instances of lifestyle creep, you should consider meeting the annual contribution limits for your retirement accounts. Redirecting funds into your nest egg directly from your paycheck can help keep the money out of sight (i.e., your checking account) and out of mind!
The bottom line: Take action against lifestyle creep today
By tracking your daily expenses for three months, finding out the totals of the categories of those expenses, discerning which expenses are truly necessary and which are not, and redirecting funds of those unnecessary expenses into building a more robust retirement account, you’ll be better able to put that boost in income to work for your long-term goals.
Additional reading:
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Article By
Damian DavilaDamian Davila is a Honolulu-based writer with an MBA from the University of Hawaii. He enjoys helping people save money and writes about retirement, taxes, debt, and more.
