How to Prevent Lifestyle Creep with Smart Budgeting

LAST REVIEWED Sep 18 2019 12 MIN READ

By Damian Davila

As you get older, you’ll gradually start finding yourself with more money left 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’s very tempting to accelerate your standard of living more quickly and aggressively than is financially healthy. The tendency to start spending more money than you really need to once you start making more money is called “lifestyle creep”, and it’s very common at a couple of life stages: mainly, young professionals who have a salary for the first time and mid-career professionals who 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 can 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 taking a look at three months of daily data, you’ll have a comprehensive view and average out special circumstances, such as gift purchases in December or vacation expenses during the summer months. Not easy but possibly more illuminating: An Excel or Google Sheet will do the trick just fine. The key is that you must keep track of every single expense, no matter whether it is paid with cash or credit, no matter how big or small. 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. The major pro of this approach is you’ll have a heightened awareness of your spending habits when you manually have to enter or log each expense, so this is can be an enlightening experience. The con is that it’s pretty labor intensive, so this probably isn’t the best approach to use for years at a time. Easier and automatic, especially for long term: There are a lot of tools for this: Personal Capital, Mint, and You Need a Budget are the most common. This is the recommended approach since most of your expenses will be logged and (in most cases) catalogued automatically so you can easily slice and dice the data to see trends in specific categories, over time, and even compare your stats to other people in your metro area. The small downside here is that this is easy to ignore if you’re stubborn, since it runs in the background and you don’t have to enter expenses manually.

Tabulate totals at the end of three months and spot instances of “lifestyle inflation”

At the end of three months of 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. Remember before you got that big raise, you used to bring a homemade lunch every single day? Now that you’re making more money, you feel that you have earned the right from now on to eat lunch at nearby delis or restaurants. On average, 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)

For a spending category like lunch, it’s 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! As a baseline, this may help: a survey from Visa found that on average, Americans spend about $1,000 per year on lunch. The article also made an interesting point that those with lower incomes tend to spend more on lunch. I’m assuming they mean they spend commensurately more than their higher-earning counterparts — this may seem counterintuitive, but it’s easy to see why this would happen. They may have less time and resources to prepare or budget for meals in advance and therefore have to resort more expensive daily purchases. For your specific budget, find a target number close to that $1,000 per year that is 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 that you eat out, deduct from that balance. If you were to have a couple extra thousand dollars extra every year due to a smaller lunch budget, wouldn’t that allow you to get closer to your financial goals, such as contributing to your child’s 529 plan or Coverdell IRA savings account or making a bigger dent to your outstanding student loan balance?

Understand the difference between wants and needs

Go through your list of expenses and identify other lifestyle creep instances. There are many 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 frappuccinos, shopping budgets, cabs, weekly happy hours, or monthly golf get-togethers can all be very tempting, but think hard about what really brings you true enjoyment and value, and whether using that money elsewhere would be more fruitful for you in the long term. If you’re an architect and you decide to incur a $660 expense every year to renew your membership with the American Institute of Architects (AIA), this could be well worth it. Having that membership with your title is a necessity in order to successfully get your foot in the door of businesses looking for building design or project management services. However, attending a monthly mixer of the AIA could enter the territory of being just a want and not a need and running a very hefty tab at the bar every time that you attend that mixer is definitely a want.

Hide your money: Beef up your emergency fund

Once you start identifying opportunities for saving, you’ll free up some money that will need a home. 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 be less tempted to spend it impulsively on daily purchases. A great place to start is to create or strengthen your rainy day fund in a CD or savings account. 75% of American households making less than $50,000 per year wouldn’t be able to pay a $1,000 bill if an emergency arose. By redirecting money from unnecessary “wants” to your emergency fund, you’ll create a solid foundation to weather any financial storms and major unexpected expenses. With a solid emergency fund, you won’t have to choose between short-term emergency expenses and making progress on your long-term financial goals. The next time that you need to replace the water heater from your home or the timing belt on your vehicle, you won’t have to refrain from contributing to your retirement account or forced to make just the minimum payment on a high-interest credit card. Further reading: Emergency Fund Basics: When, Where, and How Much?

“Hide” more of your money from yourself: Increase contributions to your retirement accounts

As mentioned above, contributing to your retirement account is a key element of any personal finance plan. By automatically contributing to your employer-sponsored 401(k) or IRA, you’re not only effectively reducing your taxable income for the current year but also you’re 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, then you should try to annual contribution limits for your retirement accounts. In 2018, you can contribute up to $18,500 ($24,500 if age 50 or over) per year to a traditional or Roth 401(k) and up to $5,500 ($6,500 if age 50 or over) to a traditional or Roth IRA. This will keep the money out of sight (i.e. your checking account) and out of mind! Preventing frivolous expenses and putting those monies in your nest egg is particularly important when receiving large, lump-sum amounts through end-of-year bonuses or commission checks, especially before the holidays!

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 the monies of those unnecessary expenses to building a more robust emergency fund and retirement fund, you’ll be able to make the most out of your boost in income. Some additional recommended reading to keep you on track:

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Damian 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.

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