What Is Lifestyle Creep?

Lifestyle creep occurs when your spending increases along with your income, often without you even realizing it. This can lead to a situation where you’re unable to save or pay down debt effectively. It might manifest as choosing more expensive housing, dining out more frequently, or upgrading your gadgets more often.

While earning more should allow you to enjoy certain luxuries, it’s crucial to set clear financial goals and be mindful of your spending habits. Here’s how you can manage lifestyle creep and make the most of your income.

Signs of Lifestyle Creep

You may be experiencing lifestyle creep if:

• What once felt like luxury spending now feels like a necessity.
• You find less money in your bank account at the end of the month without a clear idea of where it went.
• You’re more comfortable with increased day-to-day expenses, like daily takeout lunches or higher grocery bills.
• The idea of reverting to your previous lifestyle to save money seems very difficult.

How to Avoid Lifestyle Creep

The goal isn’t to deprive yourself of nice things whenever you get a raise. Instead, it’s about ensuring you’re setting aside enough for short- and long-term financial goals. Here are some strategies to keep discretionary spending in check:

Pay Yourself First

Transfer money to your emergency fund, retirement, or other savings accounts as soon as you get your paycheck. This way, you spend what’s left over, not the other way around.

Automate Your Savings and Investments

Set up automatic payments to prevent spending from getting out of control. Make automatic transfers to achieve your savings goals.

Create a Monthly Spending Plan

Recalibrate your budget as your income increases. Allocate at least half of any additional money you earn to saving, paying down debt, or investing, and spend the other half as you like.

Set Goals and Track Your Progress

Work towards key financial goals like saving three to six months’ worth of expenses in an emergency fund, saving 10% to 15% of your gross income per year for retirement, and saving for a down payment on a house or car.

Limit Revolving Debt

Increasing credit card debt is a sign that your lifestyle is no longer affordable. Too much revolving debt can also hurt your credit, making it harder to get favorable terms on new debt like a mortgage or car loan.

What to Do if Your Income Increases

When you start earning more money, it’s important to celebrate and treat yourself, but also to carefully assess how best to use your new income. Here’s what to do:

Calculate Your Actual Earnings

Identify how much you’re taking home after taxes. Plan to put half of that towards savings, paying off debt, and/or investing before spending the other half.

Strengthen Your Emergency Fund

If you don’t already have emergency savings, set up a transfer for the entire amount you’re planning to put towards financial goals until your emergency savings account is fully funded.

Pay Down Debt

Focus on paying down high-interest debt first. If the interest rates are especially burdensome, allocate more of your extra income towards it.

Add to Your Retirement Fund

Choose an amount to put towards retirement and set up an automatic transfer. Or increase your 401(k) contribution at work.

Save for Other Purposes

Set aside additional money for other financial goals like personal investments, a new car, a sabbatical, or a child’s college fund.

Enjoy Your Extra Earnings

Allow yourself to spend part of your extra income on new electronics, hobbies, or whatever you choose. You deserve to enjoy the fruits of your hard work.

The Bottom Line

Lifestyle creep doesn’t have to be dramatic to impact your financial life. If you’re starting to feel the pinch from extra expenses, it’s not too late for a reset. Take a close look at your spending and calculate how much additional money you’re earning. Make a deliberate plan to manage your finances effectively.

At O1ne Mortgage, we’re here to help you make the most of your income and achieve your financial goals. Call us at 213-732-3074 for expert mortgage services and personalized advice. Let’s work together to secure your financial future.