Avoiding Lifestyle Creep

Have you ever received a pay raise only to look back and wonder where the money went? What did you do with your last income tax refund? Do you even remember? When you look at your credit card statement, do you have trouble remembering what you bought to pile up so much debt? You may be the victim of lifestyle creep and not even realize it.

What is lifestyle creep?

Lifestyle creep is when your standard of living improves as your discretionary income rises. Gradually, any increase in income or cost savings in other areas are taken up by the little extras. For example, if you earned a small pay raise this year, maybe you have not decided to treat yourself and your family to an extra evening out at a restaurant. Your lifestyle is now creeping up with an increase of your disposable income.

Why lifestyle creep matters

There is a danger to allowing lifestyle creep to work its way into your life. There are so many other things that you could be doing with that additional income besides mindlessly spending it. The loss of that new money in your monthly budget can lead to lost savings opportunities, a lost chance to aggressively tackle your debt, etc.

When lifestyle creep finds its way into your monthly budget, you may lose focus on your financial priorities. There is a sense that new (extra) money is free money that can be spent as you choose. While this is technically true, it doesn’t help you meet your financial goals. There are much better uses of that newfound source of funds. You could increase your debt repayment schedule, finish funding your emergency fund, start saving for college education for your children, or even supplement your retirement investing.

How to detect lifestyle creep

One of the biggest problems with lifestyle creep is that it comes on slowly. It isn’t a deliberate thing. It sneaks up on you when you are least expecting it. It happens when things are going well in your financial life so you hardly even notice it.

So, how do you diagnose lifestyle creep? Now is the time to re-examine your monthly household budget. Where are you drifting off of your pre-determined budget? This is where you’ll find that you’re eating out more often, buying more clothes, going to the movies, etc. more than you originally intended.

How to prevent lifestyle creep

Like most problems, simply admitting that you have a problem is the first step. Go back to your budget and re-examine it to ensure that it matches with your financial goals and your new income level. Now that you’ve noticed that it’s happening, it’s time to recommit yourself to your budget and to rein in your spending habits. This could be a good time to completely re-write your monthly budget, as well.

Now that you’ve recaptured that money, you may want to consider how best to use it. Are you maxing out your Roth IRA or contributing the maximum to your 401(k)? Use that newfound money to increase your contributions each month.

Have you fallen victim to lifestyle creep? If so, how did you realize it was happening? And what did you do when you discovered the problem?