What is lifestyle creep?
Lifestyle creep occurs when your discretionary income rises due to earning more money or decreasing expenses (such as paying off loans). Instead of placing the additional money into savings, your standard of living increases. While increasing your standard of living is not necessarily a huge problem, the real issue is when you begin considering former luxuries to now be a necessity, and don’t adjust your savings to reflect your adjusted needs.
Unfortunately, lifestyle creep does not discriminate and can affect people of all ages. Paying off your mortgage, making your last student loan payment, becoming an empty nester or getting a raise are all ways that increase our discretionary income and put us at risk for lifestyle creep.
To make sure you’re equipped for your savings goals or if you face an emergency, consider the following before indulging:
- Have a plan. Put pen to paper and have a strategy for where you want the extra money to go. Being intentional with your money can be useful when you’re faced with a temptation to use the extra funds in a different situation.
- Increase your retirement contribution. Even if it’s only 1%, try and put some of your raise toward your retirement. Your future self will be thankful you did.
- Recalculate your required emergency fund. While you might think you already have an adequate emergency fund, ask yourself if your current emergency fund takes into account your increased discretionary income. This is especially important if your basic needs now include former luxuries.
- Automate your savings. If your plan includes putting a certain percentage of your income towards various savings goals, set up automatic deductions from your paycheck so you won’t be tempted by the extra money sitting in your checking account.
- Adjust any current automatic deductions to reflect your new income. When you get a raise, give your savings a raise too. If you contributed 10% of your old salary to your savings, make sure you’re contributing 10% of your new salary.
- Continually monitor your expenses. Being familiar with and tracking your monthly expenditures is one of the best ways to ensure your spending isn’t increasing too rapidly.
At Legacy Next, our planning portal can project how much you’ll need to save for all of your goals, guiding you when your discretionary income increases. Get more information on how we can help you grow smarter.