It’s human nature to always want more than we have.
“It’s called the hedonic treadmill, and it is the idea that humans always revert back to a baseline level of happiness and are never truly satisfied. We always want more, more, more,” Yanely Espinal, director of educational outreach for Next Gen Personal Finance, says.
You may think that a raise will solve all of your money issues — you’ll finally be able to afford nice vacations, bulk up an emergency savings account or afford a down payment on a new home — but if you’re not careful, you could end up increasing your spending so much that you sacrifice your long-term financial health.
What Is Lifestyle Creep?
Lifestyle creep — or slowly getting yourself used to luxuries and increasing your spending to the detriment of your savings capabilities — can be a dangerous phenomenon.
You work hard for your money, so you want to spend it on things that make you happy. It’s natural. But while it’s natural to want a better lifestyle as you make more money, it’s important not to overdo it.
Earning more money should correspond with more financial stability, and that’s not always the case — thanks to lifestyle creep.
“Lifestyle creep happens when an increase in income leads to an increase in spending on living expenses and nonessential expenses. In other words, things that once were luxuries when a consumer had lower income become (perceived) necessities as they make more. Some experts call it ‘lifestyle inflation,'” Kyle Enright, president of Achieve Lending, says.
[READ: 50 Ways to Improve Your Finances in 2023.]
This might mean moving into a larger home, upgrading your car or splurging on designer clothes. But if all the additional money you’re earning goes to luxury purchases instead of improving your financial security it almost cancels out the benefit of making more money.
“What happens is they are unable to improve their financial conditions because they spend everything they make,” Robert Johnson, Ph.D. and professor of finance at Creighton University, says.
Is Lifestyle Creep a Bad Thing?
To some degree, lifestyle creep is expected. Everyone wants nicer things, and if we have the money to afford them there is nothing wrong with treating ourselves.
“It’s natural to purchase more and spend more on essentials as income grows,” Enright says. “It’s also natural to want to improve your standard of living; not everyone wants to have the same furniture they did in college or maintain the same diet they did in their early 20s.”
When you aren’t able to meet your financial goals in line with increased income — like keeping six months of emergency savings on hand or funding a child’s education — lifestyle creep becomes an issue, he adds.
[READ: How Your Employer Can Help You Build Emergency Savings.]
According to Espinal, lifestyle creep becomes a bad thing when your wants and needs fall out of balance.
“The problem arises when you only spend more and you don’t save more at the same time. In other words, you lack balance and you tilt way too far toward inflating your current lifestyle goals while ignoring your future financial goals,” she says.
How to Avoid Lifestyle Creep
Experts agree that the best tip for avoiding lifestyle creep is to follow a budget.
“Ideally, you will have incorporated into your budget a percentage of income to save from every paycheck,” Espinal says.
“Some may go to retirement, some to the emergency fund, some to savings for other goals. When your income goes up, even if that percentage remains the same, it will mean additional money. But whenever you do get a raise or earn more, take a look and see if you can bump up that percentage a few points,” she adds.
[Related:How to Start Investing and Saving for Retirement With Little Money]
To avoid the temptation to spend, Enright recommends automating your savings.
“Saving before it’s ever in your hands is the best way to make sure you’ll increase your savings,” he says.
Typically, you can set up automatic transfers to a savings account when you get paid — and you can adjust the amount as your income changes.
It’s also crucial to conduct regular check-ins with yourself and your partner or family to figure out what your goals are — and if your current spending habits are helping you meet them.
“To keep moving forward financially and to avoid debilitating debt (and stress), it’s important to set goals and to do so together with your partner, spouse or family as applicable … those goals will change over time, but they are what should guide your saving and spending,” Espinal says.
Finally, prioritizing the future will make you more financially stable in the long run, so Johnson recommends building investing into your budget. If possible, live below your means earlier in your life so you can have a prosperous retirement, he says.
Tips for Managing a Larger Income
While part of lifestyle creep might come from simple overspending, it can also be a bit tricky to manage a larger income. Follow these tips to make sure you’re allocating your new funds in the best way:
— When you get a raise, invest the difference. If you’re already living a life in which you’re comfortable, it’s safest to act as if you didn’t receive a raise at all, Johnson says. He recommends putting that additional money into an investment account so you can see large returns over time.
— Prioritize paying down high-interest debt. “If you are carrying any credit card debt — or other high-interest debts — pay that down or off,” Enright says. If you’re not paying interest, you essentially get that money back into your budget and boost your credit score on the way, he adds.
— Bulk up your emergency fund. Having a healthy emergency fund that equals three to six months of expenses is of the utmost importance. Even if you’re currently making more money now, that might not be the case forever. It’s wise to prepare for the unexpected when things are good.
— Save for retirement. A larger income allows you to invest in your future and have a comfortable retirement. Enright recommends starting with maximizing your company’s 401(k) match. More disposable income also means you might be able to increase the percentage you save — and even retire earlier than expected if you invest smartly.
— Consider equity and net worth. Building wealth is about more than bringing in additional cash. You’ll also want to consider opportunities to increase your home equity or other investments. “Invest in your home if you’re a homeowner and it needs repairs or maintenance. Capital improvements also can sometimes create additional equity,” Enright says.
— Give back where you can. One benefit of making more money is the ability to pay it forward. Consider building charitable giving into your budget.
[READ: Steps to a Higher Net Worth.]
Differentiate Between Treats and Necessities
According to Espinal, choosing how to allocate your money when your income increases is a deeply personal choice.
For some, lifestyle spending might be important and short-term goals like upgrading a car or home could take priority, she says. For others, an early retirement might be the goal so investments would take the largest chunk of that raise. You just need to carefully consider the implications of your choices on your financial health.
“Getting a raise, buying a car or a new house or any other real or perceived upgrade to your financial life will spark joy initially. But pretty soon it becomes the new norm in your life and you realize that now you still want more,” Espinal says.
While we shouldn’t refrain from treating ourselves, she says, we should be careful to remember that these kinds of purchases are treats and not necessities. Otherwise, unexpected life events like medical emergencies, high inflation or losing your job can have a catastrophic effect.
The key is to strike a balance between living a happy financial life and a healthy one. Splurge on upgrades occasionally, but not at the expense of your savings or retirement.
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