Are you allowing your lifestyle to creep? If you are, it has huge implications on your long-term financial future.
In this article, I’ll cover what “lifestyle creep” is, why it is a BIG problem, and what to do instead. If you can understand lifestyle creep, you can make a few simple adjustments that can change the course of your financial future.
What is Lifestyle Creep?
What does ‘lifestyle creep’ mean? Lifestyle creep is spending more as you earn more. We all do it to some extent. For instance, you get a 10% raise and now you spend more money on a car, go on nicer vacations, or eat at higher-end restaurants. It’s easy to fall into this trap. As you make more money, you may be more tempted to move into that bigger, nicer home. It becomes more enticing to take that trip to Ireland you’ve always dreamt about. You can’t take it with you, right?
Lifestyle creep is natural. We all want to enjoy luxuries and I’m not here to suggest that you shouldn’t splurge here and there. But, I’ll suggest that you do it with discipline.
Why Lifestyle Creep is a BIG Problem
The robust pensions that many baby boomers are enjoying are unavailable to the following generations. They are going the way of the dinosaurs. In the past, many individuals worked for the same company their whole careers. They would pay into a defined benefit plan and receive retirement pension income that they couldn’t outlive. Again, these benefits are disappearing. It’s on you, the individual, to save for your financial future. Most aren’t saving nearly enough.
Unfortunately, saving enough to get the match in a workplace retirement plan and maxing out a Roth IRA just won’t cut it anymore. It is a fantastic starting point, but as you earn more, you need to take it to the next level. This is why lifestyle creep is a big problem. If you always increase your spending in lockstep with your earnings, you may be setting yourself up for failure.
What to do: Allow Your Savings to Creep as Well
Like I said before, I’m not trying to be the devil on your shoulder chastising you every time you spend money. You earned it, I want you to spend and enjoy it. The key is to have some discipline. If you are going to enjoy some lifestyle creep, you should also make sure that your savings creep, too.
Here’s how it works. If you get a 3% raise this year, I would suggest that you increase your savings rate by at least 1% and then you can increase your lifestyle by the other two. This way, over time, a third of your pay raise is invested into your future.
If you invest in a workplace plan, this will happen automatically at first. This is because you typically invest as a percentage of your income. However, if you are maxing out your work plan already, you need to invest additional money elsewhere. If you invest in a Roth IRA or brokerage account, you will need to manually change your contributions to reflect the new amount. This usually means increasing your monthly contribution to reflect the 1% amount.
Let’s look at an example. Imagine that you make $50,000 a year in gross pay. We will assume that you will get a 3% increase in pay every year for the next 20 years. In year 1, you invest 10% of your gross pay. Every year after, you increase your contribution percentage by an extra 1%. This would mean that in year 20 you are investing 29% of your gross pay.
It makes a HUGE difference. If you left your savings rate at 10%, you’d end up with just under $135,000 contributed. Increasing your savings rate by an extra percentage point per year would mean investing over $275,000! If you factor in compound interest into your portfolio returns, the impact is even greater. This is a game-changer.
I realize that investing an extra percent each year is a big commitment. The thought here is that you already are used to living on your current cash flow. With this “savings creep” you are allowing yourself to spend more but you are also making sure that your savings grows at the same time. Imagine the difference this strategy makes if you get a promotion and get a 10-20% raise!
Conclusion: To Increase Your Savings, Stop Lifestyle Creep
Lifestyle creep is a big problem for many people. If you want to dramatically increase your savings, reduce or stop lifestyle creep and start allowing your savings to creep. It’s a win win. You enjoy your higher earnings but you also save more of it going towards savings.
Keep on creepin’ on!